Page 0 PHMA Conference Military Housing Privatization 101 presented by Lisa Tychsen Office of the...

PHMA ConferencePHMA Conference

Military Housing Privatization 101Military Housing Privatization 101

presented bypresented byLisa Tychsen Lisa Tychsen

Office of the Secretary of DefenseOffice of the Secretary of DefenseHousing & Competitive SourcingHousing & Competitive Sourcing

26 January 2005

Agenda

Program Background and Legislative Mandate

Understanding the MHPI Objectives

Housing Privatization Process Overview

Primary Legislative Authorities

Why We Get More Housing Now using Privatization

Why Government Contribution

Federal Budgetary Scoring

OSD Oversight

Current Status of Program

Shortage of quality, affordable housing available to service members and their families in local communities

DoD Housing in need of repair (Historical):Family Housing

600,000 off-base / 15% unsuitable 250,000 on base / 50% need repair $16 billion - 20 years to resolve at current MILCON levels

Unaccompanied Housing 100,000 off-base 450,000 on-base / 62% need repair $9 billion - Indefinite period to resolve at current

funding levels

Not enough MILCON $ to fix the problem


1

Our Customer

Privatized Housing MCB Camp Pendleton, CA

1996 National Defense Authorization Act signed into law February 10, 1996

2005 National Defense Authorization Act --Congress removed budgetary cap and made program authorities permanent

Major tools contained in law Direct Loans Guarantees: Loan, Rent, Occupancy Investments in Non-Governmental Entities Limited Partnerships Sell, Contribute, Convey, or Lease DoD-Owned Property Differential Lease Payments Lease Housing to be Constructed or Privately Owned Units Assignment of Members and Use of Allotments


Understanding the MHPI Objectives

Current StateCurrent State Potential SolutionsPotential Solutions

• Privatize Real Estate

Assets and Services

• Outsource Services

• Dispose of Real Estate Assets

Future StateFuture State

•Reduced Housing

Deficit

•Streamlined

Government

•Revitalized Housing

•Leveraged Funds

with

Private

Resources/Expertise

Site*Nomination

FeasibilityAssessment

RFQ/RFPDevelopment

ProposalEvaluation

AwardContract

MACRO

ISSUES

SOLUTIONS

•Slow Government Process

•Old Housing

•Inadequate Resources

•Insufficient Capital

*Local, Regional, National

Military HousingPrivatization

Initiative

Post Award &

Monitoring

Housing Privatization Process Overview

Project

Definition

Project

Identification

Project

CloseoutProject

Acquisition

Project

Management

Project

Monitoring

Proposal

Evaluation

&

Project

Award

Solicitation

Development

Post Award

& Constructio

n

Our Customer


Real Estate Tools— Conveyance and/or Lease— Rent & Occupancy Guarantees— Build-Lease

Financial Tools— Direct Loans— Loan Guarantees— Rental payment by Allotment

Investment Tools— Acquisition of Limited Partnership Interest— Stock— Bonds

Nine Broad Categories of Selected Tools Grouped in Three Areas:

DoD may convey or lease property or facilities to people in the private sector who will use that property to provide suitable housing for service members.

Present Application Contribution of Government Assets

— Ground lease of on-base military land— Conveyance of existing improvements and off-base

land.

Real Estate Tools - Conveyance or Lease Property


DoD may assure occupancy or rental income in non-governmental entities involved in the acquisition and/or construction of housing and support facilities.

Present Application Rental and Occupancy Guarantees are not a useful tool

— Office of Management and Budget (OMB) scoring rules make this tool cost prohibitive

Real Estate Tools- Rent and Occupancy Guarantees


Our Customer

DoD may lease housing units to be constructed. Contract may include operations and maintenance.

Present Application Not generally considered a useful tool

— Office of Management and Budget (OMB) scoring rules make this tool cost prohibitive

Real Estate Tools- Build/Lease


DoD may loan money for the acquisition or construction of suitable housing used for service members

DoD may guarantee loans made to people in the private sector if the proceeds of the loans are used to acquire or construct housing units suitable for service members

Not to exceed 80% project value or outstanding loan balance, whichever is lower.

Finance Tools - Direct Loans & Guarantees


Present Application Very useful tools

— Direct loans are effective tools for covering development gaps. Beneficial OMB scoring relative to other tools

— Current loan guarantee product is a “limited guarantee”, which protects lenders from risk of base closure, downsizing and deployment -- does not cover economic or market risk.

Finance Tools - Direct Loans & Guarantees (continued)


DoD may invest in non-governmental entities involved in the acquisition and/or construction of housing and support facilities

Limited Partner Stock Purchase Bond Purchase Other equity or debt instruments Or any combination of above.

Investments Tools


Present Application Useful Tool for Government contribution

— Current preferred structure for completed and contemplated Navy and Army transactions

— No benefit from credit reform scoring

Investments Tools (continued)


Access to private capital Private debt (Banks and other financial sources) Equity

Government contribution— Land— Existing Housing— $ -- Debt, Equity, Subsidy— Housing Allowance



Sample Project MILCON Privatization

Total Development Cost $ 85.0M $79.4M

Gov’t Appropriation $ 85.0M $23.3M

Leverage 1:1 3.4:1

(Leverage = MILCON Equivalent/Scored Cost)


Government contributions, through use of the MHPI Authorities, are made to close development gaps, help improve the feasibility of transactions from a financial cash flow perspective, and to help attract private sector participation (e.g. capital, developers, property managers)

FINANCINGDEVELOPMENT COSTS

Legal

Developers Fee

Construct. Cost

Land/Infras.A&E

Construct.Interest

Equity

Private Debt

Gap

GROSS INCOME - = -

OPERATIONS

GROSSINCOME

OPERATING

EXPENSES

NET OPERATING

INCOMEDEBT

SERVICE

NET CASH FLOW

= Maintenance, Management, Taxes, Insurance

+ Utilities+ Replacement Reserves

= Rent+ Other Income- Vacation

Can only support private debt due to Debt Service Coverage Ratio and Loan-to-Value

= Return to Investors


Why Government ContributionAuthority Appropriation

Direct Loan

Conveyed Units

DifferentialLeasePayments

GovernmentEquity

None

$3M

$5M

$6M

ConstructionCost

$40M

Private SectorMortgage

(based on 400 new units)

$30M

DeveloperEquity

$4M

DevelopmentGap

$6M

Federal Budgetary Scoring

What is Scoring? (OMB Circular A-11) How the Federal Government budgets for the cost of government activitiesApplies to all MHPI projects that expend cash, offer credit, of financially obligates the government to future expenditures (e.g. equity contributions, direct and guaranteed loans, differential lease payments, etc.)

Tools Impact on Project Economics & Scoring

Transfer of Land/Units Reduces total development cost by reducing land cost

No scoring impact

Build to Local Standards Reduces total development cost by reducing construction cost

No scoring impact

Limited Guarantee (against base closure, downsizing, and deployment)

Ensures availability of private financing and reduces interest rate

Minimal scoring impact (3% - 7% of loan)

Direct Loan Brings additional financing through more favorable underwriting and below market interest rates

Moderate to high scoring impact depending on interest rate subsidy and deferral

Differential Lease Payments Increases gross income

High scoring impact

Direct Investment Increases directly the amount of money available for construction

High scoring impact

Impact of MHPI Authorities

HRMA

Concept Approval

OMB Scoring

Award Brief/Transfer of funds

Program Evaluation Plan

– Fact Sheet (project deal structure matrix submitted 60 days after closing)

– Monitoring Matrix (submitted every quarter for each project)

– Project Summary Report (submitted semi-annually for each project)

– Executive Summary (submitted semi-annually for the Service)

OSD Oversight

• Goals: Privatize about 140,000 by the end of FY 2005.

• Eliminate nearly all inadequates by 2007– or about 160 K units

• Meeting our goal to eliminate nearly all inadequates by 2007 is a Presidential Management Initiative

• Privatize over 90% of existing family housing inventory


•Over 82,000 total units privatized as of December 2004

•Program has grown more than five times since FY2001

Total Privatized Units

0

20,000

40,000

60,000

80,000

100,000

1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Nu

mb

er

of

Pri

vati

zed

Un

its

Deficit Reduction Units


•Private sector contribution over 85% of total

•Estimated value of $9.6 billion in total development cost (First 40 Projects)

•Leverage of 15:1 for appropriated funds (3:1 is minimum standard—OSD is flexible )

Total Project Funding(in millions)

-

1,000

2,0003,000

4,000

5,000

6,000

7,0008,000

9,000

10,000

1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Am

ount in

Millions

Total Government Funding Total Private Sector Funding


Thank you --Information

Website www.acq.osd.mil/housing

Contact info: [email protected]

Ph. 703/602-4469

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