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riving through the recently opened Frank Tejeda Estates on the edge of San Antonio, visitors may feel like they have stumbled onto the set of the movie The Truman Show. Here, winding roads meander through a mix of Southwestern-style family houses and townhouses with garages, patios and freshly landscaped front yards. All the amenities of suburban living complement the housing, from a community swimming pool to covered picnic pavilions to hiking and biking trails. The South Texas development could be the latest Sun City retirement community, but there are no retirees in this planned suburbia - only active duty Air Force personnel. Tejeda Estates is on Lackland Air Force Base.

"While my house may be a bit bigger, it's not as nice as these here," says Col. Michael Miller, vice commander for the 37th Training Wing at Lackland, who, as one of the base's most senior officers, has on-base housing. The new homes are intended only for junior officers and enlisted Air Force personnel.

Air Force Staff Sgt. David Zuback, who moved into Tejeda Estates last year with his wife and three children, says his new four-bedroom home, complete with ceiling fans, mini-blinds and double sinks in the kitchen, is the best housing he has had in his 17 years of living on military bases. "The same house would cost me $1,400 per month in downtown San Antonio," he says.

Zuback's new housing is a stark contrast to the three-bedroom, 1950s-era townhouse his family lived in at Lackland that had the look and poor maintenance record of low-income public housing. "The house shook every time the neighbor's door slammed, the ceiling fell in downstairs because the bath tub leaked upstairs, the water heater blew up twice and some of the windows didn't work," he says.

The Pentagon is all too familiar with stories like Zuback's. Now, after decades of building too few new houses and falling behind on repairs to existing ones, the Defense Department is turning over most of its housing construction and maintenance operations to private developers and property management companies through long-term partnerships and contracts. It is among the largest privatization projects ever attempted by a federal agency.

Housing Shortfalls

"The problem is the Defense Department cannot afford to pay for all of the housing it needs," says Joseph Sikes, director of competitive sourcing and privatization at the Pentagon. Without privatization, Sikes says, it would take 20 years and cost $16 billion to eliminate Defense's substandard housing. Instead, Pentagon officials hope privatization will help solve the housing crisis by 2010, while creating one of the largest new housing markets since the end of World War II.

The task will be daunting because nearly two-thirds of the 270,000 family housing units on military bases in the United States are more than 30 years old and about half need either major renovations or replacement. The numbers are even more daunting when broken down by service:

• About 60,000 of the Army's 85,000 family housing units need to be replaced or renovated.
• Nearly 60,000 of the Air Force's 104,000 family housing units need to be overhauled or replaced.
• A third of the Navy's 61,000 family units and half of the Marine Corps' 24,000 units require major repairs of at least $15,000 per home. In addition to the repairs and renovations, each of the services also needs thousands of new housing units - particularly three- and four-bedroom homes. The Army pegs its housing shortfall at about 10,000 units, while the Air Force says it is 30,000 units short. The need for expanded housing has spiked in recent years as service members have married younger and started families. In turn, lagging military pay has made it difficult for many families to rent three- and four-bedroom houses off base. Defense has not issued a final estimate of how much building new houses will cost, but it will likely run into the billions of dollars.
  

These housing problems have caught the attention of the new administration. In February, President Bush said fixing military housing would be a Defense priority and pledged to seek an additional $400 million for improving housing in his fiscal 2002 budget.

Impact on Readiness

The Pentagon expects that privatization of military housing will not only improve living conditions for the families of the nearly 300,000 soldiers, sailors, airmen and Marines who live on military bases (most families live in off-base housing), but improve readiness and retention rates.

"If an airman is deployed away from his or her home station and has to be worried about his family having housing problems . . . there is naturally an impairment in that airman's ability to do his or her job. There's a direct link between happy people and mission accomplishment," says Air Force Maj. Gen. Earnest Robbins, who oversees the housing effort as the service's top civil engineer.

Army Lt. Gen. Leon LaPorte, commander of the III Corps at Fort Hood, Texas, where more than 6,000 housing units are being privatized, says housing is a "family readiness issue" and improving it reflects the Army's commitment to retaining young soldiers. "If you are living in substandard quarters where you can hear everything happening in the next apartment, you have no parking, you don't have a place for the kids to play and your spouse says, 'This isn't much fun,' what's your incentive to stay in the organization?" LaPorte asks.

Over the past decade, Congress has increasingly paid lip service to quality-of-life issues such as housing. But legislators have rarely put money behind dealing with such issues. Rep. David Hobson, R-Ohio, chairman of the House Appropriations Subcommittee on Military Construction, says the Defense budget for military housing is "always a bill payer" for other spending priorities, such as weapon systems. "That's a problem when you want to hold people in the service, but then take their quality-of-life money," says Hobson.

Turning to Privatization

Since 1990, the military construction budget, which funds construction of new family housing, maintenance of existing units and other construction and repair projects on military bases, has remained stagnant, rising only from $8.4 billion in fiscal 1990 to $8.6 billion this year. In most years, the budget approved by Congress has been hundred of millions of dollars short of the the Pentagon's request. The fiscal 2001 budget includes $287 million for building 1,656 new family housing units on military bases - about 25 percent less than the amount earmarked for housing construction in the 2000 Defense budget.

The budget squeeze has left the services little choice but to look toward innovative partnerships with private firms. "All the services realized they could not reach their goal without some privatization. There's just not enough [construction] money," says Hobson. While not offering up money, lawmakers have given the Defense Department unprecedented authorities since 1996 for privatizing housing, including:

• Allowing service members' housing allowances to be used for leasing on-base housing from contractors.
• Allowing Defense to make 'differential' lease payments to developers if housing allowances fall short.
• Permitting direct loans to developers for acquiring or building housing.
• Guaranteeing rent payments to developers even in the event of downsizing or major deployments.
• Permitting the services to form limited partnerships with contractors and to invest in nongovernment entities.
• Allowing Defense property to be sold, conveyed or leased to contractors.
  

Congress initially approved the authorities for five years in 1996, then extended them until 2004. Hobson says he would like Congress to give the Defense Department permanent authority for privatizing housing in 2005.

The new approach allows the services to strike privatization deals that are far more complex - and innovative - than typical contracts for building military housing. The services got off to a slow start, however, because of traditional cultural resistance to change and the difficulty of learning how to execute large-scale financial and real estate transactions. After early trials and errors, each of the services now has its own privatization program.

More bang for the buck

All of the privatization deals involve turning over housing allowances to developers over several decades in exchange for building, maintaining and managing housing on military bases. Developers borrow millions of dollars from banks and other financial institutions to begin new construction and renovation projects. They make their money back - in addition to a profit over the course of a typical 50-year deal - by receiving a steady income from housing allowances.

Traditionally, military members only receive housing allowances if they live off base and pay rent. Those living on base don't get allowances, but don't pay any rent or utilities for their housing. Instead, the money budgeted for their housing allowances is used to maintain and build on-base housing. The allowance varies based on market conditions, the service member's rank and the size of his or her family. In fiscal 2001, total Defense housing allowances will reach $6.5 billion.

"The genius of this program is using the housing allowances as a form of revenue [for developers]," says Mahlon Apgar, who served as assistant secretary of the Army for installations and the environment in the Clinton administration. The loans that developers can leverage using housing allowances will allow new housing to be built much faster than through the military construction budget, Apgar says.

Chris Hunt, executive vice president of Hunt Construction, an El Paso, Texas, developer that is working on Air Force and Navy housing privatization projects, says the military housing deals are "like an annuity" because they provide a steady stream of income over a long period. "These deals are attractive because you have a government subsidy," he says.

Defense has left it up to the services to decide what authorities to use in privatizing housing, setting only two ground rules: The services must get developers to put up at least three times as much money as the military invests to get projects off the ground and must eliminate inadequate housing by 2010. "We've allowed everyone to use different authorities because we want to see who can get the best deal," says Sikes, adding that the Pentagon is monitoring the approaches to see what works best.

community living

The services are using different methods of housing privatization. The Army, for example, is pursuing a 'whole-base' approach, which focuses on hiring a single developer to build communities, not just housing units, for an entire base. "When you start looking at child abuse, spouse abuse, domestic problems and divorces, a lot of those have to do with the environment people live in. What we are trying do is create a better environment so that some of the social issues that all communities live with can be addressed by the way we design and organize these things," LaPorte says.

The Army has tapped three bases - Fort Hood, Texas; Fort Lewis, Wash.; and Fort Meade, Md. - as the pilot sites for its Residential Communities Initiative. At those bases, the Army is seeking developers who will work with the service to draw up a master plan for building housing communities throughout the base. The developers agree to renovate or replace all existing base housing, build new units and maintain and upgrade the base's entire housing stock over the course of a 50-year partnership. The Army says the effort will save $1.5 billion in military construction costs at the first three bases.

Robert Erwin, the Residential Communities Initiative program manager at Fort Hood, says the Army recently inked its first deal, with developer Lend Lease Actus of Napa, Calif., to revitalize nearly 6,000 housing units at the base. The developer has hired the architect who designed the athletes' village for the 2000 Olympic games in Sydney, Australia, to design Fort Hood's new communities, complete with town centers, landscaping and drainage basins that double as ponds and streams. "You come back five years from now and you will not recognize this place," says Erwin.

Under the deal, the Army will guarantee Lend Lease Actus about $4 billion in housing allowances over the next five decades to own and operate all base housing. The developer will leverage those dollars for upfront loans to renovate and replace nearly 5,000 units in the first five years of the contract and the remainder by 2010. Additionally, the developer will set aside some of the money for scheduled repairs, such as new roofs every 15 years, and will manage and maintain the properties for the Army. After the contract expires, the housing units become Army property. Without privatization, the Army says, it would have taken 40 years to replace Fort Hood's dilapidated housing.

Ted Lipham, who oversees the Army's Residential Communities Initiative effort at the Pentagon, says the service is using a novel approach to select base developers. Instead of issuing lengthy, technical requests for proposals from contractors, the Army solicits shorter, conceptual design proposals and a summary of experience and qualifications from developers. Once a developer is selected - based on such factors as the amount they are willing to invest up front, past performance, cost estimates and concept - the Army works with the contractor for six months to draw up a detailed plan for revitalizing base housing. Then, Congress must approve the final cost of the plan. "There are so many different aspects [to housing development] that we feel like we need to first find a qualified developer rather than saying, 'Here, do this,' " Lipham says.

The Army's process, however, has drawn criticism for limiting competition by choosing a developer based on a conceptual design. "A 50-page proposal doesn't allow you to play to your strengths. It's essential to have qualifications, but you shouldn't end the procurement there," says Hunt, whose company lost out on the Fort Hood contract. The Pentagon also has expressed concerns about the approach. Sikes says the Army cannot be certain it is getting the best deal because "competition is limited." Nevertheless, the Army is seeking Pentagon and congressional approval to expand the request for qualifications approach to Fort Bragg, N.C.; Fort Campbell, Ky.; and Fort Stewart, Ga. Ultimately, 90 percent of the Army's housing will be overhauled through privatization, Lipham predicts.

The Air Force meanwhile, will privatize only about half of its 59,000 substandard housing units; the rest will be upgraded or replaced using funds from the military construction budget. "The Air Force has always looked at fixing the problems with a balanced approach," says Robbins, noting privatization must prove a better financial option than retaining the housing for the Air Force to pursue it.

Unlike the Army's approach, which initially focuses on large bases most in need of overhauls, the Air Force will make smaller deals to build and repair thousands of houses at more than 16 bases over the next year. "The savings we realize by privatizing can be plowed back into our housing accounts to take care of some of those areas we are not going to privatize," says Robbins.

Other Air Force housing privatization deals are expected to follow the model developed at Lackland in San Antonio, where contractors were solicited to build housing through traditional requests for proposals that were judged on both cost and design. The service will initially build housing only on military land that can be severed from the rest of the base and sold off if service members no longer need the housing or bases are shuttered. As a result, the Air Force favors privatizing housing at bases that are located in strong commercial housing markets, such as San Antonio.

The Air Force's agreement at the San Antonio base called for the Landmark Organization, an Austin, Texas, developer, to initially build the 321 new housing units that make up Tejeda Estates - and to operate and maintain them for the next 50 years. The agreement also requires repairs and renovations at hundreds of other units over five decades. In exchange, the contractor will receive the housing allowances of the families living in those units and a lease for the land on which to build the units. The Air Force has invested $6 million at Lackland, compared to $48 million by Landmark, for an 8-to-1 return on its investment. The Air Force will own the units when the contract expires.

Robbins says it took an "inordinate" amount of time, nearly two years, to privatize housing at Lackland because the Air Force is not well-versed in large real estate deals and financial transactions. The service is retaining consultants, known as privatization support contractors, who will work with bases to expedite privatization.

Jimmy Dishner, deputy assistant secretary of the Air Force for installations, says that at its current pace, the service will eliminate substandard housing by 2014, but is looking at options to accelerate its efforts to meet the Pentagon's 2010 target date. He predicts that as more projects like Lackland get off the ground, the Air Force will increase its reliance on privatization. "I would be surprised if, in 20 years, we were not privatizing all of our housing," Dishner says.

Public-Private DEALS

The Navy and Marine Corps view privatization not only as a way to improve housing, but also as an investment opportunity. Both the services are forming limited liability companies with developers to speed up military housing construction. The arrangements require the services to take on a greater financial burden, but also enable them to share in the revenues generated by housing privatization. "Our privatization projects focus on investment with private sector partners," says Eric Milner, senior program manager for Navy and Marine Corps public-private ventures at the Naval Facilities Engineering Command in Washington.

The limited liability companies can be used for developing housing on naval bases and government land, as well as on private land. The partnerships include many of the features pursued by the other services, such as using housing allowances to pay for on-base housing. But the agreements also make use of other congressional authorities, such as allowing the services to invest in non-government entities and convey excess land to private developers.

In December, the Navy formed a limited liability company known as Gateway Everett with developer Kirtley-Cole of Washington state and other financial and property management companies. The firm will build 288 townhouses on private land close to several naval installations in Everett, Wash. The Navy will invest $18.9 million in the project and guarantee full occupancy by service members or allow the units to be leased on the commercial market. The developer will ante up $42.3 million and set rents to match housing allowances. The private sector partners will be responsible for construction, repairs and property management. The joint venture will last 30 years. Then the housing units will be sold off, with the Navy and the developer splitting the proceeds. Additionally, the Navy will receive a share of the income generated during the partnership at prenegotiated rates that can go toward repairs, into housing reserve accounts or back into the U.S. Treasury.

The Navy is pursing similar deals on naval bases and on government-owned land near Navy facilities. Those deals do not allow land to be sold and are often 50-year arrangements that end up with housing transferred back to the Navy, Milner says. The Navy, however, still shares in the revenues during the partnership.

The Marine Corps is set to announce a public-private venture in June that will give a developer 419 excess 1950s-era housing units and 130 acres of land at the Marine Corps Logistics Base in Albany, Ga., for private development. In exchange, the developer will build at least 100 new townhouses at Camp Lejeune, N.C. A limited liability company to be formed by the Marine Corps, the developer and key contractors will allow the Corps to share in revenue from leasing these units.

Both the Navy and the Marine Corps say the public-private ventures will allow them to eliminate inadequate housing by 2010.

Early Reviews

Most observers applaud the services for getting housing privatization under way after years of delays, but they also say it is still too early to tell whether the projects are offering improved housing at a better price. "The jury is still out," says Jim Hathaway, a program manager at the Logistics Management Institute, a nonprofit government consulting company in McLean, Va., that has assisted the Navy in its housing privatization efforts. Hathaway says the new approach should be judged not only on new construction and renovation efforts, but also on how well contractors operate and maintain the housing. That will take years, Hathaway adds.

The General Accounting Office gave a similar assessment in a review of the program in March 2000 ( "Military Housing: Continued Concerns In Implementing The Privatization Initiative," NSIAD-00-71). The report concludes that several key questions remain unanswered, including whether the military will need the housing for the entire 50 years of many of its deals; whether developers will operate and maintain housing in accordance with the contracts; and whether the savings will meet Defense's estimates.

"The military housing privatization program was slow to start," said Deputy Defense Secretary Paul Wolfowitz in Feb. 23 written testimony submitted for his Senate confirmation hearing. But, he said, with several projects now under way, privatization has proven to be a "powerful and important tool" in fixing Defense's housing shortfall. "The success of the program depends on capturing lessons learned at the initial projects and applying them as we move forward," Wolfowitz said.

Sikes says the services are determined to make privatization work because there are no other options for fixing housing under current budget constraints. "Compared to where we were in 1996, we have a lot of enthusiasm from the services, so I believe we can make this work," he says.

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