Public-Private Partnership Policy Casebook/DOD Housing

Summary

The United States Department of Defense (DOD) has been providing a housing allowance for military personnel since 1949. This allowance has had various configurations and is currently designated as a Basic Allowance for Housing (BAH).. BAH is paid to service members who do not occupy on or off based government provided quarters and is based on military rank, marital status, geographical location and whether the member has dependents. The allowance is tax free and currently provides 99 percent of the housing costs.

Ft Lewis Washington Before MHPI

With over 60% of the 257,000 on-base housing units in desperate need of repair or replacement, the DOD looked at alternative methods to deliver this project. The DOD Housing Project is formally called the Military Housing Privatization Initiative (MHPI) and began in 1996. “The Military Housing Privatization Initiative (MHPI) is a public/private program whereby private sector developers may own, operate, maintain, improve and assume responsibility for military family housing, where doing so is economically advantageous and national security is not adversely affected.”

The MHPI allows the DOD to enter into agreements with private companies at the installation/base level to revitalize (or rebuild) the on base housing, often cheaper and certainly faster than a traditional Military Construction (MILCON) project. Each project is scored by the Office of Management and Budget (OMB) based on a realistic risk of potential long term liability. This score is used to identify the percentage of the total project cost that must be covered by the Agency’s budget authority for that year.

Ft Lewis Washington After MHPI

Before MHPI, while technically eligible for BAH, service members living in government provided quarters were not paid the allowance, as the assignment to government quarters was provided in lieu of the allowance. Under MHPI, service members residing in base housing receive the allowance, and similar to private housing the allowance is then paid to the contractor as rent. The rent is established based on the same criteria as eligibility for BAH, i.e. military rank, marital status, geographical location and whether the member has dependents. This policy insures service members with the same status are provided exactly the same entitlement towards their housing expenses.

List of Actors

• Congress (Subcommittee on Military Construction of the House Appropriations Committee)
• Department of Defense (Office of the Deputy Under Secretary of Defense – Installations and Environment)
• Department of the Army
• Department of the Navy (includes U.S. Marine Corps)
• Department of the Air Force
• Individual Installation Commander and Housing Staff
• Numerous and Various Contractors and Management Companies

Timeline of Events

1949: Career Compensation Act of 1949 passed. Among other items, an allowance for housing was passed.

1996: The Military Housing Privatization Initiative (MHPI) started

1998: The housing allowance was officially renamed Basic Allowance for Housing

2004: MHPI was made permanent

Maps

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Narrative

The U.S. Department of Defense has been providing on base housing or an allowance for off base housing since 1949. The allowance has gone through numerous variations and was established as Basic Allowance for Housing (BAH) in 1998. BAH is paid to service members who do not occupy on or off based government provided quarters and is based on military rank, marital status, geographical location and whether the member has dependents. The allowance is tax free. Before MHPI, while technically eligible for BAH, service members living in government provided quarters were not paid the allowance as the assignment to government quarters was provided in lieu of the allowance.

The DOD relies primarily on the commercial market to provide housing and when the market cannot provide quality, affordable housing, within a reasonable commuting distance, the DOD steps in to fill this void. A new service member with a family (referred to as Junior enlisted personnel) is quite frequently priced out of affording these off base facilities.

Faced with the realization that over 60% of the 257,000 on base housing units were in desperate need of repair or replacement, and estimating that using traditional MILCON, the cost to revitalize or rebuild would be 16 billion dollars and take 20 years to finalize, the DOD looked at alternative methods to deliver this project. Additionally, DOD determined that Housing was no longer a core competency and the expertise existed in the private sector to develop and manage housing. Private companies also had access to capital. Therefore, a Public Private Partnership was explored.

The 1996, the National Defense Authorization Act created the Military Housing Privatization Initiative (MHPI). “The (MHPI) is a public/private program whereby private sector developers may own, operate, maintain, improve and assume responsibility for military family housing, where doing so is economically advantageous and national security is not adversely affected.” The MHPI allows the DOD to enter into agreements to facilitate real estate transactions with private developers and property managers at the installation/base level to revitalize (or rebuild) the on base housing. MHPI deals are 50 year leases with an option to add 25 more years.”

With vast differences in installation requirements and cost of living differences due to the local economy, the agreements are finalized at the Installation level. There is no “cookie cutter” project that can be replicated across the continental U.S. Each project must undergo a feasibility study before a solicitation is developed. The DOD uses a Non-FAR, Request for Proposal (RFP) or Request for Qualifications (RFQ) process. The proposals are evaluated and should a successful bidder be selected, terms are agreed to by the Service. Prior to closing, the service must provide Congress a 30 day notice. After close, monitoring is required by the individual service on its own project. The office of the Secretary of Defense has oversight responsibility and provides a written report to various government stakeholders, including an annual report to members of Congress.

Perhaps the most significant change under the MHPI is that service members who are housed on base are now paid the prevailing BAH rate for their duty location. DOD considers these houses to be private housing. Members are then required to reimburse the management company of the quarters the full amount of their BAH. Before MHPI, the quarters were provided in lieu of the BAH. The change allows a continuous funding flow for the life of the contract and requires minimal to no additional funding by the Government.

A cost of living adjustment is made annually and any increase in BAH is automatically added as a rent increase and is passed to the contractor. Additionally, service members that are promoted receive an increase based on their new military rank; this raise in BAH entitlement is too passed along to the contractor. A waterfall policy is in place to protect the contractor against low occupancy levels. This policy allows them to rent unoccupied quarters based on a priority list to personnel who are not active duty military assigned to the installation. These personnel must be cleared by a background check and would pay the local market rate, which is generally higher.

While the DOD will not guarantee the occupancy rate of the quarters, it has done much to remove any and perhaps all risks from the contractor. Under the MHPI Legislation, the contractor is safeguarded from any disruption in the flow of rental payments in the event of base closure, downsizing, or deployment, i.e. Base Realignment and Closure (BRAC). Service members are required to pay their bills on time and commercial vendors are aware that a single call to the service members chain of command will rectify any delinquency.

Finance and Funding

Finance

Public Financing

• Direct Loans - A direct government loan is usually secured by a second mortgage on the property and may not exceed the amount of a private loan.

• Loan Guarantees - A loan guarantee is an assurance that if the government or military reduces tenant supply (through base closure, force reduction, or major deployments) that the housing project owner cannot maintain the project and service the debt, the loan will be paid by the government.

• Leasing of Housing - The military may lease the housing directly and allow service members to live in leased housing. The service members are allowed a choice to live in the leased housing. The owner is still required to maintain and operate the leased housing

• Investments - The military service may invest in the private owner through stock, bonds, or the limited partnership interest. A cash investment may be no more than 33.33% of the project. If investing with facilities or land, the investment may be no more than 45% of the project. Cash investments must be approved by Congress after a 30 day notice to the appropriate committees.

• Differential lease payments - In addition to the rent payment from the tenant, the government may make additional payments to the owner to insure that housing is available to military members.

Private Financing

• Equity - Minimum equity depends upon the service. The Air Force requires 5% equity by the private developer.

• Debt - Debt may be loans or bonds.

Funding

• BAH - The housing manager will collect rent from military members. Rent is to be equivalent to the amount of BAH received by the member. Calculate an individual's BAH

• Rent - If the housing does not have a minimum occupancy with only military members, civilian personnel may live on base and pay market rent.

Policy Issues

Competition with Local Community Housing

DOD policy is to rely on the private market to provide quality, affordable housing, within a reasonable commuting distance. Junior enlisted personnel are quite frequently priced out of affording these off base facilities. The MHPI is targeted towards them. Service members are given the option to live on or off base and the decision is generally based on what the service members’ requirements are, as well as the cost. If the local economy cannot provide an acceptable unit, then the Service has no option but to provide a living unit for them.

Pricing of On Base Housing

Similar quarters are priced differently as the rent is based on the service members’ military rank. All other considerations the same, an E-4 would pay less than an E-5 living right next door. The same is true should a member be assigned to quarters and then receive a promotion. The rent increases on the unit they currently occupy based on the BAH for the new pay grade. While rent generally increases annually in off-base housing a promotion would not have any effect on the current rent. This is fully explained prior to acceptance of the unit by the service member

In deciding on an off base unit, service members have the option to take a smaller unit than allowable, and reduce their costs. Any expenditure below the BAH rate is pocketed by the service member, no such option is available by on base personnel. However, in many cases, a junior member will not be able to afford similar sized quarters off base as on base.

Civilians occupying space on Military Bases

A tenant waterfall policy has been enacted by each service in order to insure the contractor does not lose money on the project. This policy specifies that on base units must maintain a baseline occupancy level (defined at installation level). Should occupancy dip below this baseline for the specified number of months, the contractor would be allowed to execute the waterfall policy to rent the available units to entities other than active duty military assigned to the installation. "The order of priority is

1. other military members not assigned to the installation or unaccompanied service members,
2. federal civil service employees,
3. retired military,
4. guard and reserve military,
5. retired federal civil service employees,
6. DoD contractors/permanent employees, and
7. general public.”

Each non-military tenant must successfully pass a background check prior to occupancy. Rent to these occupants is charged based on local market rent, which is generally higher.

Risks

While the DOD will not guarantee the occupancy rate of the quarters, it has done much to remove any and perhaps all risks from the contractor. Under the MHPI Legislation, the contractor is safeguarded from “any disruption in the flow of rental payments in the event of base closure, downsizing, or deployment...Other powerful incentives further safeguard against the likelihood of tenant defaults. Landlords may elect to contact base housing authorities directly if a military housing tenant is delinquent or in default on regular monthly rental payments. The legislative guarantees against risk, the income stability of the tenant, the effective default reporting mechanism, and the generally strong discipline of the military combine to practically eliminate the risk of default for prospective military housing tenants under MHPI.”

Discussion Questions

1. Was this a good project for the DOD to undertake?
2. Do you believe there was an alternative method of delivery?
3. Is it appropriate that service members be responsible for paying the rent on a government installation?
4. Is the DOD sharing the risks appropriately with the private sector?
5. Do the military services' 50-year partnerships with profit-driven real estate corporations create conflicts of interest that are detrimental to military family residents?
6. What, if any objective oversight is administered to ensure the private contractors comply with the terms of their 50-year public-private venture housing contracts?
7. Why did EPA defer oversight and enforcement of public health, safety and environmental laws in these residential communities on federal lands to states that lack jurisdiction?
8. Should US tax payers continue paying millions of dollars in BAH every month to private corporations that cannot verify the homes they lease to military families are safe?

Additional Reading

DOD Housing Management Manual

Selected Excerpt of the Military Construction and Military Family Housing Laws

Basic Allowance for Housing Information

Military Housing Privatization - DOD Official Website