1. Page 0 PHMA Conference Military Housing Privatization 101 presented by Lisa Tychsen Office of the Secretary of Defense Housing & Competitive Sourcing 26 January 2005

2. Page 1 Agenda  Program Background and Legislative Mandate  Understanding the MHPI Objectives  Housing Privatization Process Overview  Primary Legislative Authorities  Why We Get More Housing Now using Privatization  Why Government Contribution  Federal Budgetary Scoring  OSD Oversight  Current Status of Program

3. Page 2 n Shortage of quality, affordable housing available to service members and their families in local communities n DoD Housing in need of repair (Historical): Family Housing n 600,000 off-base / 15% unsuitable n 250,000 on base / 50% need repair n $16 billion - 20 years to resolve at current MILCON levels Unaccompanied Housing n 100,000 off-base n 450,000 on-base / 62% need repair n $9 billion - Indefinite period to resolve at current funding levels n Not enough MILCON $ to fix the problem Program Background and Legislative Mandate 1

4. Page 3 Our Customer

5. Page 4 Privatized Housing MCB Camp Pendleton, CA

6. Page 5  1996 National Defense Authorization Act signed into law February 10, 1996  2005 National Defense Authorization Act --Congress removed budgetary cap and made program authorities permanent  Major tools contained in law  Direct Loans  Guarantees: Loan, Rent, Occupancy  Investments in Non-Governmental Entities  Limited Partnerships  Sell, Contribute, Convey, or Lease DoD-Owned Property  Differential Lease Payments  Lease Housing to be Constructed or Privately Owned Units  Assignment of Members and Use of Allotments Program Background and Legislative Mandate

7. Page 6 Understanding the MHPI Objectives Current State Potential Solutions Privatize Real Estate Assets and Services Outsource Services Dispose of Real Estate Assets Future State Reduced Housing Deficit Streamlined Government Revitalized Housing Leveraged Funds with Private Resources/Expertise Site* Nomination Feasibility Assessment RFQ/RFP Development Proposal Evaluation Award Contract MACROISSUESMACROISSUES SOLUTIONSSOLUTIONS Slow Government Process Old Housing Inadequate Resources Insufficient Capital *Local, Regional, National Military Housing Privatization Initiative Post Award & Monitoring

8. Page 7 Housing Privatization Process Overview Project Definition Project Identification Project Closeout Project Acquisition Project Management Project Monitoring Proposal Evaluation & Project Award Solicitation Development Post Award & Construction

9. Page 8 Our Customer

10. Page 9 Primary Legislative Authorities  Real Estate Tools — Conveyance and/or Lease — Rent & Occupancy Guarantees — Build-Lease  Financial Tools — Direct Loans — Loan Guarantees — Rental payment by Allotment  Investment Tools — Acquisition of Limited Partnership Interest — Stock — Bonds Nine Broad Categories of Selected Tools Grouped in Three Areas:

11. Page 10 DoD may convey or lease property or facilities to people in the private sector who will use that property to provide suitable housing for service members. Present Application n Contribution of Government Assets — Ground lease of on-base military land — Conveyance of existing improvements and off-base land. Real Estate Tools - Conveyance or Lease Property Primary Legislative Authorities

12. Page 11 DoD may assure occupancy or rental income in non- governmental entities involved in the acquisition and/or construction of housing and support facilities. Present Application n Rental and Occupancy Guarantees are not a useful tool — Office of Management and Budget (OMB) scoring rules make this tool cost prohibitive Real Estate Tools- Rent and Occupancy Guarantees Primary Legislative Authorities

13. Page 12 Our Customer

14. Page 13 DoD may lease housing units to be constructed. Contract may include operations and maintenance. Present Application n Not generally considered a useful tool — Office of Management and Budget (OMB) scoring rules make this tool cost prohibitive Real Estate Tools- Build/Lease Primary Legislative Authorities

15. Page 14 DoD may loan money for the acquisition or construction of suitable housing used for service members DoD may guarantee loans made to people in the private sector if the proceeds of the loans are used to acquire or construct housing units suitable for service members  Not to exceed 80% project value or outstanding loan balance, whichever is lower. Finance Tools - Direct Loans & Guarantees Primary Legislative Authorities

16. Page 15 Present Application n Very useful tools — Direct loans are effective tools for covering development gaps. Beneficial OMB scoring relative to other tools — Current loan guarantee product is a “limited guarantee”, which protects lenders from risk of base closure, downsizing and deployment -- does not cover economic or market risk. Finance Tools - Direct Loans & Guarantees (continued) Primary Legislative Authorities

17. Page 16 DoD may invest in non-governmental entities involved in the acquisition and/or construction of housing and support facilities Limited Partner Stock Purchase Bond Purchase Other equity or debt instruments Or any combination of above. Investments Tools Primary Legislative Authorities

18. Page 17 Present Application n Useful Tool for Government contribution — Current preferred structure for completed and contemplated Navy and Army transactions — No benefit from credit reform scoring Investments Tools (continued) Primary Legislative Authorities

19. Page 18 n Access to private capital Private debt (Banks and other financial sources) Equity n Government contribution — Land — Existing Housing — $ -- Debt, Equity, Subsidy — Housing Allowance Why We Get More Housing Now using Privatization

20. Page 19 Why We Get More Housing Now using Privatization Sample ProjectMILCONPrivatization Total Development Cost$ 85.0M$79.4M Gov’t Appropriation$ 85.0M$23.3M Leverage1:13.4:1 (Leverage = MILCON Equivalent/Scored Cost)

21. Page 20 Why Government Contribution Government contributions, through use of the MHPI Authorities, are made to close development gaps, help improve the feasibility of transactions from a financial cash flow perspective, and to help attract private sector participation (e.g. capital, developers, property managers)

22. Page 21 Equity Private Debt Gap GROSS INCOME - = - OPERATIONS GROSS INCOME OPERATING EXPENSES NET OPERATING INCOME DEBT SERVICE NET CASH FLOW = Maintenance, Management, Taxes, Insurance + Utilities + Replacement Reserves =Rent +Other Income -Vacation Can only support private debt due to Debt Service Coverage Ratio and Loan-to-Value = Return to Investors Why Government Contribution

23. Page 22 Why Government Contribution AuthorityAppropriation Direct Loan Conveyed Units Differential Lease Payments Government Equity None $3M $5M $6M Construction Cost $40M Private Sector Mortgage (based on 400 new units) $30M Developer Equity $4M Development Gap $6M

24. Page 23 Federal Budgetary Scoring What is Scoring? (OMB Circular A-11)  How the Federal Government budgets for the cost of government activities  Applies to all MHPI projects that expend cash, offer credit, of financially obligates the government to future expenditures (e.g. equity contributions, direct and guaranteed loans, differential lease payments, etc.)

25. Page 24 Impact of MHPI Authorities

26. Page 25  HRMA  Concept Approval  OMB Scoring  Award Brief/Transfer of funds  Program Evaluation Plan –Fact Sheet (project deal structure matrix submitted 60 days after closing) –Monitoring Matrix (submitted every quarter for each project) –Project Summary Report (submitted semi-annually for each project) –Executive Summary (submitted semi-annually for the Service) OSD Oversight

27. Page 26 Goals: Privatize about 140,000 by the end of FY 2005. Eliminate nearly all inadequates by 2007– or about 160 K units Meeting our goal to eliminate nearly all inadequates by 2007 is a Presidential Management Initiative Privatize over 90% of existing family housing inventory Current Status of Program

28. Page 27 Over 82,000 total units privatized as of December 2004 Program has grown more than five times since FY2001 Current Status of Program

29. Page 28 Private sector contribution over 85% of total Estimated value of $9.6 billion in total development cost (First 40 Projects) Leverage of 15:1 for appropriated funds ( 3:1 is minimum standard—OSD is flexible ) Current Status of Program

30. Page 29 Thank you --Information Website www.acq.osd.mil/housing www.acq.osd.mil/housing Contact info: Lisa.Tychsen@osd.mil Lisa.Tychsen@osd.mil Ph. 703/602-4469