May 14 2007

Asset Management Gets Real

Photo: Forrest MacCormack
David Eales, realty asset manager at the Postal Service

A 100,000-square-foot office building in Charleston, S.C., is a poster child for the government's property management problems.

Laden with asbestos, the L. Mendel Rivers Federal Building has sat empty since Hurricane Floyd slammed into it in 1999. Various property and environmental regulations stalled cleanup efforts and its sale to private developers—despite its attractive downtown location.

After spending $300,000 a year to maintain the vacant facility, the General Services Administration and the city finally struck a deal last year to exchange the structure's land and demolition costs for a new, city-financed federal building in another part of town.

Precisely these kinds of cost drains spurred the Bush administration to issue Executive Order 13327, which directs agencies to improve their real property asset management.

The order made better management of federal property a new rating category on the President's Management Agenda for the 14 agencies that manage most of the government's property.

Government and industry officials say taxpayers pay millions of dollars in unnecessary maintenance costs for surplus and vacant buildings like the one in Charleston, while the government misses out on potential revenue from the sale or lease of valuable property.

But real property management is a thorny issue. The latest PMA scorecards show that all but two of the rated agencies have red, or unsatisfactory, ratings. That's because estimates of real property assets are so fuzzy—agencies lack management plans and inventories of property holdings are incomplete.

"It is not entirely clear how many billions of dollars of real property assets the federal government has," acknowledges Robert Batson, counselor to the controller at the Office of Management and Budget. Estimates drawn from agencies' financial statements peg the value of federal property assets at between $330 billion and $500 billion, he says.

Agencies also are unclear as to just how well their current holdings support their missions or how many facilities are surplus.

No Info

"The federal government simply doesn't have a clear indication of what's being used efficiently," Batson says. "We need to know what we need, what we don't need and what we must do to manage [what's left] efficiently."

Enter President Bush's executive order. The administration ordered agencies to assign senior real property officers, establish the Federal Real Property Council to develop best practices and create a database of all federal holdings.

"We're moving from managing individual assets to more of a portfolio management approach."
— VA's James M. Sullivan

"By putting real property management inside the PMA, the administration demonstrated that this was a priority," says Geoffrey Segal, director of privatization and government reform policy at the Reason Foundation, a think tank in Los Angeles. "It's encouraging that these discussions are happening during tight budget times. Reducing maintenance expenditures means the government will get extra cash."

But critics contend the order is an unfunded mandate that puts agencies in a regulatory bind. Separate regulations restrict how agencies dispose of surplus properties and what happens to revenue.

In most cases, proceeds from sales go into the Treasury Department's coffers, not back to the agencies' spending accounts.

So, although the new council is evaluating potential rules changes, successful real property management will be difficult unless Congress revisits the laws currently on the books, observers say.

Finding revenue to reduce the federal budget deficit isn't the only motivation for improving property management.

Over the past decade, workforce re-ductions and mission changes have shrunk the government's physical space needs. The shift to online transactions for agencies interacting with one another has also had an effect: The government is consolidating and shuttering field offices.

As the evolution of e-government continues, agencies should expect to bear the cost of maintaining aging physical infrastructures until the government devises a method for efficiently reshuffling holdings and jettisoning unneeded ones.

"In real property asset management, we're dealing with the evolution of a professional discipline that only recently has had a spotlight shone on it," says Ray Summerell, vice president of corporate development for Vista Technology Services. The Herndon, Va., company advises organizations on tracking property assets and using technology to improve the management of holdings.

"It's surprising how many agencies don't have a handle on where all their offices are and how many they have," he says. "But somehow the business of government goes on."

Because hard numbers don't exist, a critical first step for the government initiative is for agencies to inventory their property for inclusion in the new governmentwide database. The most recent property estimates come from a fiscal 2001 General Accounting Office report that valued federal assets at $328 billion for 3.3 billion square feet of government-owned or -leased space.

GAO identified the Defense Department, Postal Service, GSA and Veterans Affairs Department as the largest property holders.

For its part, DOD has steadily unloaded property since the end of the Cold War. As of September 2004, DOD had shed more than 360,000 acres of surplus property through the Base Realignment and Closure program. The closure program, which dates back to the 1980s, has resulted in $29 billion in savings through 2003. A new round of closings is slated to occur this year.

USPS also has had positive financial results with property management. Over the past eight years, it has sold almost 500 properties and reaped about $700 million in revenue. Meanwhile, VA says it's reducing its holdings through partnerships with developers similar to the deal GSA struck with Charleston. But these agencies are lucky because they have flexibility other agencies can only dream about.

The Rules Rule

The Federal Property and Administrative Services Act of 1949 is the prime regulatory culprit. It along with later laws forces agencies to shop vacant property around to other agencies, not developers hungry for prime properties.

Uncle Sam's Real Property, by the Numbers
Value of property assets: $330 billion to $500 billion
Volume of government-owned or leased space: 3.3 billion square feet
Largest property holders: DOD, GSA, USPS and VA
Agencies exempt from the Property Act: DOD, USPS and VA
DOD space reductions through 2004: 360,000 acres
Savings at DOD through 2003: $29 billion
Value of USPS properties disposed of since 1997: $700 million

DOD and VA are exempt from the disposal rules. And as a quasi-governmental organization, USPS can sell, lease or dispose of unneeded properties as it sees fit.

Efforts to give agencies more flexibility in property management have been under way for years.

One template for change is HR 2548, a 2003 bill that sought to give GSA new powers for managing federal property. The bill called for rules that would allow and define public-private development partnerships. The Congressional Budget Office estimated that the bill could reduce discretionary spending by $225 million over four years.

Although the House of Representatives failed to pass the bill, the Bush administration incorporated some components in its executive order, including creation of the real property council.

House lawmakers intend to revise and reintroduce the bill this year, says Drew Crockett, spokesman for the House Government Reform Committee.

"We're still trying to figure out what to put in a new version," adds Crockett, whose boss, Rep. Tom Davis (R-Va.), has long advocated revamping the way the government handles property. He says Davis will keep pushing for changes, especially for public-private property partnerships.

When Davis' committee considered HR 2548, he noted that there had been no significant changes to the Property Act in 50 years, and it hampers the government's ability to effectively manage its holdings. Davis says agencies need more flexible rules for managing property and modern tools to help ease the process.

Let Freedom Ring

USPS and VA officials say freedom from the Property Act has made it possible for them to improve their asset management.

USPS spends about $900 million a year to maintain 37,000 post offices and other facilities. The agency continually reassesses its property needs. Operations managers nationwide identify properties that are no longer needed and update an agency database.

"We get to keep the money, which puts a different tilt on how our properties are dealt with."
— USPS' David Eales

The service's Realty Asset Management Office then decides what to do with the excess property: lease or sell. These decisions are based in part on the service's Transformation Plan, which takes into account how USPS can meet custormer demands at minimal total cost—the number and location of facilities are chief considerations.

USPS realizes $50 million yearly in leasing deals and recently sold some prime real estate to the University of Pennsylvania for $50 million.

Because it needn't send any proceeds to Treasury, all returns are reinvested in postal programs, says David Eales, manager of the realty asset office. "We get to keep the money, which puts a different tilt on how our properties are dealt with."

Over at VA, the Office of Asset Enterprise Management is developing a long-term property management plan and a strategy for public-private ventures.

VA is among the government's largest property holders. It manages more than 5,600 buildings, with roughly 150 million square feet of space. The most recent replacement value estimates for VA's structures approached $32 billion, but that doesn't include the estimated land value.

But the reality is that VA has more property than it needs. A 2003 analysis found that VA underutilized nearly 29 million square feet of space, of which 9 million square feet are vacant.

Given its expansive health-care system, VA holds titles to hospitals and other care facilities in nearly every state. To evaluate its medical property needs, VA created the Capital Asset Realignment for Enhanced Services program to assess its needs now and in the future. VA has mapped a property strategy to that assessment and is realigning its infrastructure.

Photo: Forrest MacCormack
James M. Sullivan, VA's deputy director of asset management

"We're moving from managing individual assets to more of a portfolio management approach," says James M. Sullivan, VA's deputy director of asset management. "We're looking at asset management in terms of the right mix of new and old assets that we need now and in the future, how to minimize underperforming assets and how to deal with excess assets when they reach the end of their lifecycle."

Sullivan expects the analyses to fundamentally change how VA buys, manages and disposes of property.

He too is on the public-private partnership bandwagon. VA has the flexibility to offer a developer long-term rights to unneeded parcels of land in return for consideration of a benefit that serves veterans, such as building a clinic on a portion of the site or on other VA property.

VA has pursued such agreements in earnest for the past two years.

Regardless of which property management approach the government takes, agencies must always base their decisions on mission goals, Sullivan says.

"Our primary goal is to ensure we have the right infrastructure in the right locations to provide health care in a safe, clean and effective way. We don't want to manage real estate just for the sake of managing real estate."