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STATEMENT OF 

DUNCAN HOLADAY
DEPUTY ASSISTANT SECRETARY OF THE NAVY
(INSTALLATIONS AND FACILITIES)
BEFORE THE 
SUBCOMMITTEE ON MILITARY INSTALLATIONS AND FACILITIES
OF THE 
HOUSE ARMED SERVICES COMMITTEE
ON
MILITARY HOUSING PRIVATIZATION

3 MAY 2001

               Good day, Mr. Chairman and members of the Committee, I am Duncan Holaday, Deputy Assistant Secretary of the Navy for Installations and Facilities. I appreciate the opportunity to speak to you today on where the Department of the Navy (DON) is today on Public/Private Ventures (PPVs) for housing. I will also discuss the way ahead.

Overview

            The Department of the Navy is committed to ensuring that all Navy and Marine Corps members and their families live in safe, affordable housing. The new Administration shares this objective. The President has proposed to increase funding in the FY-2002 budget to improve the quality of housing for military personnel and their families, although at this time we do not know how much of this funding will be allocated to the Department of the Navy.

There are an estimated 37,200 inadequate units[1], representing 45 percent of the DON's military family housing stock. Using military construction alone, it would take $4.5 billion to renovate or replace all of the inadequate homes in our inventory.

            The Department of Defense has established a goal for the Military Departments to eliminate their inadequate family housing units by Fiscal Year 2010. Public/private ventures (PPVs), together with improved housing allowances and military construction, form a three-pronged strategy to meet this goal. The Navy and the Marine Corps remain on track to meet this goal. Without privatization, the DON would not meet this goal. I want to assure the Committee that I firmly believe that we will continue to use this three-pronged approach, tailored to the unique needs of individual installations and local market conditions, to address our family housing requirements.

            The power of PPV is embodied in the ability to leverage resources, as provided by the authorities enacted by Congress as part of the Fiscal Year 1996 Defense Authorization Act[2]. This leverage allows us to combine private sector capital and expertise with our investment contribution to construct, renovate, manage, and maintain housing, rather than rely on financing the entire amount with government resources as we have done in the past.

            The Department has taken a deliberate, measured approach in evaluating which blend of authorities would provide the desired leverage with sufficient protection of the Government's resources and interests over the long-term. We are now bringing projects to fruition. There is no doubt in my mind that we are on the right course. As I will discuss shortly, the program is now producing significant, tangible results.   

Initial Projects in Texas and Washington

            The Navy awarded the first two PPV projects within the Department of Defense in Texas and Washington in 1996 and 1997, respectively. The limited partnership projects were initiated under authorization provided in FY 1995 to the Department of the Navy to enter into limited partnership projects. These projects were for Sailors and their families assigned to the Naval Station, Ingleside, TX; the Naval Air Stations, Corpus Christi and Kingsville, TX; and the Naval Station, Everett, WA. The Navy entered into limited partnerships with private sector developers for the construction of housing on private sector land. Under these agreements, Navy families were referred to the units by installation housing offices. The Navy members entered into leases and paid rents directly to the property manager. These projects produced almost 600 new homes for Sailors and their families. The units have been completed and occupied for over three years. 

            Although surveys show that our members are satisfied with the housing, these were our first projects; there have been growing pains. We found that the terms of the Texas deals allowed rents to escalate faster than housing allowances, forcing Sailors to pay the additional cost for rent and utilities on their own. We were able to fix that problem using one of the tools provided by Congress in the 1996 legislation - differential lease payments (DLP). Since November 1999, when the DLPs were first implemented, the number of Navy families living in the limited partnership units have increased by almost 33 percent. As of January 2001, military families accounted for 92 percent of the occupancy of our Texas and Washington PPV units. There are over 700 military members on the waiting list for this housing.

Pilot PPV Projects

Since enactment of the expanded housing privatization authorities in 1996, we have invested a significant amount of time and effort in formulating a business approach, enlisting support from commanders and senior enlisted personnel, and devising a strategy for identifying and developing PPV candidates. Critical questions raised by the Committees on issues such as Government liability, sufficient long-term investments, disposition of cash flows, etc., dictated that we take a thoughtful approach. We have fashioned an approach that protects the interests of the Government over the life of these projects. These protections include the DON's ability to play a major role in the significant decisions that will be made, such as use of recapitalization reserves, hiring and firing of property managers, refinancing, assignment of interests, etc. We have been able to demonstrate to both officers and senior enlisted leadership that our approach is thoughtful and protects the Government's interests. Most importantly, they see that the use of PPV authorities will quickly and dramatically improve the living conditions of the families under their charge.

I appreciate the opportunity over the past several years to engage in a dialogue with this Committee and respond to ideas and concerns about how the Department was implementing PPVs. Together, we have crafted PPV projects that make good business sense for the Navy, developers, and taxpayers - - - and provide excellent housing to our Sailors, Marines and their families who will call this housing their home.

Three Recent PPV Awards

            I am very pleased to report that we are now reaping the benefits of these efforts. In November and December 2000, we awarded three PPV projects totaling 1,150 units. These projects are at the Marine Corps Base, Camp Pendleton, CA; Naval Air Station, Kingsville, TX; and Naval Station, Everett, WA. The latter two projects are follow-on efforts to the initial Navy PPV projects in 1997. The DON has been able to leverage $43 million of its resources to stimulate the investment of over $140 million in constructing, replacing, and renovating housing for our Sailors, Marines, and their families. As a result, 512 existing homes will be renovated or replaced and an additional 638 homes will be constructed. Construction work has already begun on all three projects. The first units will be ready for occupancy later this year.

            I would like to now briefly outline the essential details of each of these three projects:

          Marine Corps Base, Camp Pendleton, CA. This project was awarded on November 10, 2000 to the Hunt Building Corporation of El Paso, TX. It privatizes 512 existing units and constructs 200 new homes, for a total of 712 homes. Of the 512 existing units, 312 will be replaced and 200 will be renovated. The project provides a 50-year lease of underlying land, conveyance of the existing improvements, and a $19.4 million direct loan by the Government.

          Naval Air Station, Kingsville, TX. The project was awarded on November 28, 2000 to the Hunt Building Corporation of El Paso, TX. It involves the construction of 150 family housing units on private sector land. The project involves the formation of limited partnership, of which the Navy is a member. The term of the project is 30 years, with a Government option to terminate the partnership at any point after 15 years. The Navy provided a $4.3 million equity contribution, a $2.4 million direct loan to the developer, and conveyed 30 acres with 244 family housing units, in poor shape, located at Texas Terrace. During the period of construction, Texas Terrace is being leased to the developer with a stipulation that Navy families may live there and pay only their basic allowance for housing (BAH), which will cover both rent and utilities. Once the new homes are constructed, Texas Terrace will be conveyed fee simple to Hunt for continued use as rental housing or reuse, at their discretion.   

Naval Station, Everett, WA. The project was awarded on December 28, 2000 to Gateway Everett LLC of Annapolis, Maryland. It involves the construction of 288 family housing units on private sector land. The deal involves the formation of a limited liability company (LLC), of which the Navy is a member. The Navy provides a $12.2 million equity contribution and will make differential lease payments to the LLC for the first 15 years in order to keep housing costs within the members' housing allowances. The term of the project is 30 years, with the Government option to terminate the LLC at any point after 15 years.

Additional PPV Awards Planned
 
         In addition to these projects, we are planning to award another four Navy and Marine Corps projects this fiscal year. These are at San Diego, New Orleans, South Texas, and, finally, a project combining Albany, GA and Camp Lejeune, NC. These projects total almost 5,000 homes in scope. On 4 April, 2001, I notified the Congressional Committees of our intent to award the project at San Diego. This will be, by far, our largest project to date, accounting for over 3,200 existing and new homes. I am excited about the prospect of bringing the other projects to the Committee in the very near future.   

            There are another four firmly planned projects totaling 2,235 homes that we expect to award after FY 2001. These are at Hampton Roads, VA; Stewart Army Subpost, NY; Beaufort/Parris Island, SC; and a regional project involving three Navy installations in the Philadelphia/Harrisburg, PA area. The Hampton Roads project would involve a joint partnership with the Virginia Housing Development Authority (VHDA). We are expecting a proposal from VHDA shortly. The Stewart project is under solicitation. We expect to issue solicitations for the other two projects within the next several months.

With your continued support, we will turn these projects into a reality - resulting in quality, affordable housing for Navy and Marine Corps families.

The Way Ahead

            We are continuing to explore the feasibility of PPV at other Navy and Marine Corps locations. The Department's family housing master plan, submitted to the Congress in July 2000, identified eight locations where PPV is under consideration. These locations consist of Charleston, SC; Great Lakes, IL; Long Island, NY; New London, CT; Whidbey Island, WA; Marine Corps Base, Hawaii; and follow on PPV phases at San Diego and Camp Pendleton, CA. Analyses are now being conducted to evaluate the potential of PPV at these and other installations to evaluate candidate projects in terms of leverage, life cycle savings, and other considerations. We expect the list to change, through additions or deletions, as we go through this process. I expect that our next update of the master plan, to be provided to the Committees this July, will reflect changes based on this on-going analysis, including an update on potential PPV locations for the future.

            We also are continuing to explore the feasibility of applying the PPV authorities to our barracks needs. There are unique considerations associated with bachelor housing, such as team building and unit cohesion that will influence how we go about barracks privatization. To date, we have focused our efforts almost exclusively on family housing projects. This, in no way, suggests that the needs of our single Sailor or Marine are any less than those of their married counterparts. One of our most pressing housing issues is that approximately 25,000 single Sailors live aboard ships even while in homeport. Their "house" is a rack, which is less than 20 square feet, aboard ship. I am working with the Navy and Marine Corps to develop sound barracks PPV projects that we can bring forward to the Congress.

            In addition to evaluating sites for use of PPV authorities, we are continuing to refine our approach. One thing we have learned is that a major value in the PPV authorities is the flexibility to tailor an approach to specific demand and supply conditions at any given installation and its surrounding economic climate. An example of this is the ability to incorporate differential lease payments within the overall deal structure to buy down the cost of housing to the end user - the military family.

            We are continuing to monitor the effects of the Secretary of Defense's initiative to increase the BAH over the next several years. I cannot over-emphasize the importance of this initiative in improving the quality of life of members and their families. Almost three out of every four Navy and Marine Corps families currently draw BAH and live in private sector housing. We are finding that the BAH increases are positively affecting the financial aspects of our PPV deals. The increased income stream in projects reduces the "gap" between the total development cost and supportable debt. As a result, less Government resources would be required to close that "gap." Also, we have taken steps to ensure that the increased cash flow from the BAH increases stays in the project for use in recapitalization of the housing or for other needs that may arise during the term of the agreement. 

            We also recognize the potential of PPV in addressing the issue of old, large housing that may require significant investments for repair and modernization. Our Pennsylvania project includes the replacement or renovation of flag officer quarters. This will give us an opportunity to evaluate the costs and benefits of including special quarters, such as historic housing or old, large general and flag officer quarters, to ensure their inclusion in PPV deals makes good business sense.

            In conclusion, by virtue of hard work on the part of the Navy and Marine Corps, and through the support of this Committee, we are now producing quality housing for military families much sooner than would have otherwise been possible. At the same time, we are confident that we have built in the necessary safeguards to protect the Government's, and taxpayer's, interests. I look forward to continued dialogue with this Committee as this program matures.

That concludes my statement. I will be pleased to answer any questions you may have.

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