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The Future of Military Housing Privatization

Bob Helwig, Deputy DirectorOffice of the Secretary of DefenseHousing & Competitive Sourcing Office

PHMA – January 22, 2007

Bob Helwig, Deputy DirectorOffice of the Secretary of DefenseHousing & Competitive Sourcing Office

PHMA – January 22, 2007

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Overview

• Reaching the 2007 Goal• Privatization After 2007• The Great Privatization Debate• Managing the Privatized Portfolio• The Year Ahead

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Awarded Privatization Projects

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

FY96 FY98 FY00 FY02 FY04 FY06 FY08

# o

f U

nit

s P

riva

tize

d

Fiscal Year –Award Date

68,208

1,0004,744404

26,100

186,000+

42,163

142,000

112,715

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• Over 87% of existing U.S. inventory will be privatized by 2010– - 90% of families will draw allowances (private sector + privatized)

– - 10% of families in government owned or leased housing

> 195K Privatized~ 65K Govt Owned

A Changing Ownership Structure

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Progress Towards Adequacy

0

30000

60000

90000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

# o

f U

nit

s

Inadequates Eliminated * 55 Projects- As of January 2006

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* 55 Projects- As of January 2006

Total Project Funding(in millions)

-1,0002,0003,0004,0005,0006,0007,0008,0009,000

10,00011,00012,00013,00014,00015,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Am

ount

in M

illio

ns

Total Government Funding Total Private Sector Funding

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Total Privatized Units

020,00040,00060,00080,000

100,000120,000140,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Nu

mb

er o

f P

riva

tize

d U

nit

s

Deficit Reduction Units

Total Privatized Units

020,00040,00060,00080,000

100,000120,000140,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Nu

mb

er o

f P

riva

tize

d U

nit

s

Deficit Reduction Units

* 55 Projects- As of January 2006

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Privatization After 2007

• Family Housing• Unaccompanied Housing• Lodging• Overseas Housing• Enhanced Use Leasing• Expanding the Use of the Privatization Principles

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The Great Privatization Debate

• Enactment of MHPI – 1996• OMB Director Raines Memo – 1997• Budget Cap Eliminated – 2003• New OMB Circular A-11 - 2005 • New Credit Model – 2005• New OMB Director’s Memo – 2005• The 2007 Goal

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Authority Appropriation

Direct Loan

Conveyed Units

DifferentialLeasePayments

Equity

None

$3M

$5M

$6M

ConstructionCost

$40M

Private SectorMortgage

(based on 400 new units)

$30M

DeveloperEquity

$4M

DevelopmentGap

$6M

Financial Development Gap

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Early Housing Privatization Principles (When Life was Easy)

• Ensure Valid Housing Requirements• Leverage Appropriations by 3 to 1• Long-Term Costs better/equal Milcon• Ensure Competition• Fix Enlisted Problem First

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OMB Director’s Memo

• A New “Raines Memo”– Issued 2 Aug 05

– Meant to supplement the 25 Jun 97 Raines Scoring Memo

• “Guidance on the Use of Limited Liability Partnerships and Corporations in Military Housing”– Applicable to “Co-Owned LLC” Structures

• To Complete the President’s Management Initiative:– LLCs Approved until 30 Sep 10

– LLC’s Approved for Barracks Privatization

– After 2010 LLC’s Scored Under “Traditional Rules”

• “Purely Private” entities scored under Raines• Reporting DOD Privatization Plans to OMB

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New Credit Scoring Rules

• From One “bucket” to Four• Starting with the FY06 “Cohort” of Credit Deals (Projects Including

Direct Loans or Loan Guarantees)– Projects are Evaluated based upon Four Factors (Project

Characteristics)• Location• Financial• Occupancy • Housing Quality

– Each Project Receives a Numerical Score and is Classified into One Credit Classifications

– Each Classification has Risk and Recovery Rates– Adjusted Annually in Credit Model

• Complications and Debates

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Managing the Privatization Portfolio

• Implementing the Financial and Business Structure to move: – From Asset Ownership and Control to Management of Real

Property and Contract Interests

– From Assignment of Occupants to Referral of Tenants

– From Seeking Appropriations in the Budget to Monitoring Investments and Outstanding Debt

– From Contracting for Construction Projects to Partnering in Housing and Community Development

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The Changing Portfolio

• Integrated Projects• Projects at Joint Bases• Projects Expanding due to Realignment or Increased

Recruitment• Restructured Projects with Reduced Requirements

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Why Project Integration?

• Private Sector Business Efficiency• Compliance with the 33% and 45% investment limitations

under 10 U.S.C. 2875 • Rich Project, Poor Project Problem

– Requires Approval by the Limited Partner

– Higher Approval Depends on the Nature and Terms of the Restructuring

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Business Process Initiative (BPI)

• Identify Roles and Responsibilities• Budget Preparation• Project Approval• Project Funding• Budget Re-Estimates• Accounting and Reporting

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DOD and Extra-DOD Oversight

• PEP Report and Portfolio Management System• Housing Choices Survey• Office of Management and Budget• Government Accountability Agency• Congressional Committees

– New SAC Committee Report Tracking Project Maintenance and Funding in Reinvestment Accounts

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The Year Ahead

• Meet 2007 Goal• Promulgate Housing Manual• Promulgate BPI• Expand Privatization Principles• Implement Housing Choices Study• Define Barracks Problem and Plan Solution• Enhance Privatization Professionals

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Are There Any Questions?