GlobeSt.com EXCLUSIVE: Leasing Vehicle Revitalizes Unused Fed Assets

Enhanced-Use Leasing, as it was described during the session, is pretty much exactly what it sounds like. "It's the government's term for taking real estate--either land or facilities--that are underutilized and determining if there's a value to putting it to use in the public or private sector to generate revenue for the government," Brown explained. The vehicle was instituted via legislation passed in 1992.

The properties involved are underutilized but are not deemed as excess, and the developer or owner is bound by a ground-lease that is typically 50 years but not more than 75 years. The private firm develops or renovates the property with its own funds and is allowed to lease out the space to others at market rates. Brown and Burke act as advisors to the government, looking at real estate from the perspective of the builder or owner and then marketing projects for development.

"We advertise," said Penn, "through E-mails and various publications." Once a property has been targeted for EUL, a forum is held and potential developers crunch the numbers on the project before deciding to submit a bid. The program has proven successful so far, and interest from the private sector appears to be increasing, albeit slowly.

"There's a certain amount of skepticism dealing with the federal government, so some developers might hesitate," Bostonia's Molino noted.

Gallun, of Veteran Affairs, offered further insight into what is probably the initial challenge of facilitating an EUL project. "The problem is we come out with something developers have never seen before, so the challenge for us is to put this in context of what they do," he said. "They need to equate investment and return. People are not gong to sign our deals to lose money."For its part, the government cannot take on any of the risk in these projects as far as construction and lease-up are concerned. The government works closely with the developers but steers clear of outright partnerships. And by law, the feds have to get fair-market value for the project. There also has to be built-in flexibility. If a developer decides to back out of the lease, or some other issue arises, the government has to have an exit strategy. But once everyone gets beyond the particulars, EUL, more often than not, proves to be beneficial for all parties involved.

Some successful projects include a vacant, boarded-up, historic building at Fort Sam in Houston that had been nothing more than a drain on resources. The building underwent redevelopment and now offers operational office space leased to the private sector. At Walter Reed, a project is under way to develop a new 250,000- to 300,000-sf administrative building with medical research laboratory space on an eight-acre parcel. Some pursuits, such as lodging properties and prisons, have not proved feasible yet.

But the EUL developments are not limited to office space and the like. "We've done everything from child care centers to golf courses," Gallun noted. "The mechanism works irrespective of the project."

Looking ahead, all the panelists believe that the government has just broken the surface with EUL, and that the projects will continue to expand. Walter Reed's Alan King sees Veterans Affairs and Walter Reed pursuing mutually beneficial projects, such as hospitals, down the road. There are still a few kinks that need to be worked out.

"We have got to act more like a business and work more hand-in-hand with the private sector," Burke said. "Hopefully, we'll see some more legislative initiatives."

However, the general prognosis for the future of EULs appears to be outstanding. "We're just chipping the tip of the iceberg," Penn said. "We think we're at the beginning."