Military Housing Privatization
Congress established the Military Housing Privatization Initiative (MHPI) in 1996 as a tool to help the military improve the quality of life for its service members by improving the condition of their housing. The MHPI was designed and developed to attract private sector financing, expertise and innovation to provide necessary housing faster and more efficiently than traditional Military Construction processes would allow. The Office of the Secretary of Defense has delegated to the Military Services the MHPI and they are authorized to enter into agreements with private developers selected in a competitive process to own, maintain and operate family housing via a fifty-year lease.
MHPI addresses two significant problems concerning housing for military Service members and their families: (1) the poor condition of DoD owned housing, and (2) a shortage of quality affordable private housing. Under the MHPI authorities, DoD works with the private sector to revitalize our military family housing through a variety of financial tools-direct loans, loan guarantees, equity investments, conveyance or leasing of land and/or housing/and other facilities. Military Service members receive a Basic Allowance where they can choose to live in private sector housing, or privatized housing.
On February 11, 1996, President Clinton signed into law the National Defense Authorization Act for Fiscal Year 1996, Public Law 104-106 (110, Stat 186, Section 2801)
, containing authorities for the Military Housing Privatization Initiative (MHPI). This act includes a series of authorities that allow DoD to work with the private sector to build, renovate and sustain military housing. The goals are to:
- obtain private capital to leverage government dollars,
- make efficient use of limited resources, and
- use a variety of private-sector approaches to build and renovate military housing faster and cheaper for American taxpayers.
Housing Problems - New Authorities
DoD currently faces two significant housing problems:
- The condition of DoD-owned housing is poor, and
- There is a shortage of affordable, quality private housing available to Service members and their families.
Today's Military Living in Yesterday's Houses
Today's military is living in yesterday's houses. DoD currently owns 257,000 family housing units on- and off-base. About 60 percent need to be renovated or replaced because they have not been sufficiently maintained or modernized over the last 30 years. Using the traditional military construction approach, it would cost taxpayers nearly $16 billion and take 20 years to solve this problem. Furthermore, traditional military construction requires contractors to adhere to military specifications, which make projects significantly more costly than building to market standards.
Too Few Units On-Base, Too Few Affordable Units Off-Base
DoD policy is to rely on the private sector to provide suitable housing for Service members and their families. The services have been directed to acquire family housing only for families that can't find suitable housing in the private sector.
This means the majority of service families live in local communities. Most of them are families of enlisted personnel, whose salaries are at the lower end of the military pay scale, making it difficult for them to find quality, affordable housing within a reasonable commuting distance. In addition, some of these communities, located in extremely rural or metropolitan areas, do not have enough affordable, quality rental housing to accommodate Service members and their families.
Information from the Past and Present Will Improve the Future
While the quality of existing on-base military housing has declined during the last three decades, deployments and family separations have lengthened, out-of-pocket expenses for Service members living in private housing have risen, and demands on military personnel and their families have increased.
A DoD Quality of Life Task Force report confirmed these disconcerting trends and warned that readiness and morale are in jeopardy. Continuing to neglect these issues runs the risk of collapsing the force because even the most dedicated Service members will decide to leave the military. This is why MHPI is so important to DoD, Service members and their families, and American taxpayers.
The National Defense Authorization Act for Fiscal Year 1996 provides DoD with a variety of authorities that allow us to obtain private-sector financing and expertise to improve our housing situation. These authorities can be used individually or in combination and include the following:
- Guarantees, both loan and rental
- These can be loan or rental guarantees. We can guarantee mortgage payments, directly or through an intermediary, or provide a limited guarantee against base realignment and closure (BRAC), force reductions, or major deployments. DoD can also provide guarantees for mortgage insurance. Finally, we can guarantee rent and occupancy levels as specified in an agreement.
- Conveyance or leasing of existing property and facilities
- DoD can convey or lease family housing units to private persons for purposes of using proceeds to finance the privatization projects.
- Differential lease payments
- This authority allows DoD to pay the difference between the negotiated rent and basic allowance for housing to make housing available to Service members.
- Investments, both limited partnerships and stock or bond ownership
- The investment authority allows DoD to invest in nongovernmental entities involved in the acquisition or construction of family housing and supporting facilities. These investments can be in the form of limited partnerships, for which DoD provides cash, land, or facilities as equity. A limited partnership arrangement operates purely as a private business: DoD has no part in the management. Although no minimum cash contribution has been set for any DoD investment in a project, there is a maximum cash contribution. DoD may invest a maximum of 33.5 percent of the capital cost of a project. Because all sites and projects differ, and because the services each prioritize their own projects, the full 33.5 percent cash contribution may not be needed in each project. However, DoD also has the authority to convey land or buildings as all or part of its investment. If it chooses this route, it may not exceed 45 percent of the total capital cost if land or facilities are conveyed. For projects involving renovation, replacement, and support facilities, DoD’s total equity contribution may not exceed 45 percent of a project's capital cost. As a stockholder, DoD may be involved in the management of a project without losing limited liability. DoD could have considerable control over a project if it provides capital through a loan, bond. or mortgage.
- Direct loans.
- DoD may offer a direct loan. The title, land, and improvements remain with the developer.
Advantages for the Military, Venture Capital Opportunities for the Private Sector
MHPI promotes a mutually beneficial relationship between DoD and the private sector. For DoD, it results in the construction of more housing built to market standards for less money than through the military construction process. Commercial construction is not only faster and less costly than military construction, but private-sector funds significantly stretch and leverage the DoD’s limited housing funds.
Developers and financiers can find significant venture capital opportunities in DoD housing. Privatization opens the military construction market to a greater number of development firms. MHPI stimulates the economy through increased building activity, and MHPI projects can provide a long-term continuous inflow of capital to an investor.
DoD allows as much flexibility as possible for developers and financiers to create the best possible proposals. However, we have identified several broad guidelines to give offerors some direction. We want to:
- ensure our Service members and their families are properly housed on and off military installations;
- leverage our funds with private capital;
- involve local governments to help with infrastructure, financing, permits and use their knowledge of local developers;
- integrate projects with private-sector housing, with a mix of bedroom sizes; and
- have housing projects developed within reasonable commuting distance of military installations.
Project Solicitation and Development Process
The Services nominate installations that have large housing deficits or need housing renovations. They visit and evaluate each site with contracted private-sector finance experts, identify problems, determine which authority best addresses site issues, hold industry forums to introduce the project to the private sector, and then draft and issue the solicitation. Once the solicitation is issued, the service holds local preproposal conferences so officials may travel to the communities and meet with developers and financiers, who may have questions and want to learn more about the process and project specifics. The service then reviews and evaluates the proposals and makes a selection. DoD notifies Congress of the proposed contract. The contract is executed, and the developer obtains final zoning, site plan approval, and financing.