VA Testimony of James Sullivan before Congress on February 6, 2006

United States Department of Veterans Affairs

TESTIMONY OF
JAMES M. SULLIVAN
DEPUTY DIRECTOR, OFFICE OF ASSET ENTERPRISE MANAGEMENT
OFFICE OF MANAGEMENT
DEPARTMENT OF VETERANS AFFAIRS
BEFORE THE SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
INFORMATION, AND INTERNATIONAL SECURITY
COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS,
UNITED STATES SENATE

February 6, 2006

Mr. Chairman and Members of the Subcommittee, I am pleased to appear this afternoon to provide you with an overview of the Department of Veterans Affairs’ (VA) ongoing efforts and processes to strategically manage underutilized and vacant space within VA’s system.

VA is the owner, tenant and operator of one of the largest healthcare related real estate portfolios in the nation. Its inventory consists of an assortment of land, buildings, and facilities such as hospitals, clinics, and office buildings. Many of these facilities currently are used, managed, and maintained in relation to and for promotion of the respective activities of VA’s “Veterans Health Administration” (VHA), “Veterans Benefits Administration” (VBA), and “National Cemetery Administration” (NCA). In total, there currently are approximately 32,527 acres of land and 5,306 buildings on approximately 300 sites.

At the close of FY 2005, VA owned 148,645,698 square feet of which 4,971,815 square feet of underutilized space have been outleased generating revenue for VA. Of this total square footage, VA reduced underutilized space and increased revenue-generating space by 1,035,205 square feet from fiscal year 2004. Nationwide, the cost per square foot to operate and maintain VA properties was equivalent to $4.98 per square foot for a holding cost total of $758,867,828, based on Federal Real Property Council definitions, in fiscal year 2005.

VA utilizes a unique capital asset management tool called enhanced-use leasing to better manage underutilized properties. From underutilized assets, revenue is redirected back to the healthcare and capital operations of our medical centers, cemeteries, and benefits offices that serve our nation’s veterans every day. Revenue from these projects helps provide additional funding to the medical centers through healthcare and capital costs with enhanced use agreements. In 2005, VA received over $900,000 in-kind consideration in form of cash and $28,000,000 in one lump enhanced-use lease payment. VA partners with private or non-profit entities that, in turn, provide, as consideration, low-cost senior housing, co-generation energy facilities, single room occupancy housing (homeless shelters), child care, mental health centers, office buildings, and parking facilities that are not VA programs.

VA does, however, have a significant number of properties in its inventory that are not in the “right” geographic locations and in many cases are over 50 or 60 years old. Nationwide, 7,413,625 of the total VA square footage, or 5%, is vacant but scattered throughout the country. As modern trends in healthcare move away from large inpatient units and more toward outpatient care, VA may see large areas of vacant space at one facility, while another facility may have a significant need for additional space.

I now want to discuss with you VA’s efforts in managing this complex property portfolio while continuing to increase benefits and enhance services to veterans.

CARES

Former Secretary Anthony Principi formed the Capital Asset Realignment for Enhanced Services (CARES) Commission to conduct a “comprehensive, system-wide approach…, identifying the demand for VA care and projecting into the future the appropriate function, size, and location for VA facilities.” The Commission submitted findings and recommendations in February of 2004, offering an objective and external perspective into VA’s CARES planning process. On May 7, 2004 the Secretary released his CARES Decision based on the Commission’s findings and recommendations for each CARES site. This Decision became VA’s roadmap into the future.

In fact, Veterans Integrated Service Network (VISN) 12, here in Chicago is the site of VA’s first use of enhanced-use leasing to implement a CARES realignment decision and dispose of an unneeded property. On January 18, 2005, VA signed a 75-year enhanced-use lease with Northwestern Memorial Hospital (NMH) and Rehabilitation Institute of Chicago (RIC) for two parcels of land totaling 3.8 acres. VA realized $28 million upon signing the lease and another $22 million upon its disposal. This is an example of a very successful disposal of underutilized property. The Lakeside lease resulted in a demonstrable improvement of services to eligible veterans by permitting VA to offset the cost of implementing CARES in the City of Chicago and other locations, and avoid future maintenance of aging health care facilities. The lease also ensures the continuation of quality medical care for Chicago area veterans through VA’s use of monetary consideration from the Lakeside enhanced-use lease to fund additional FY 2006 capital improvements.

VA’s Portfolio Management Approach

VA utilizes a three-tiered portfolio management approach. This approach is the blueprint for portfolio management nationwide. First, VA manages what we have more effectively through Federal Real Property Council (FRPC) performance standards as well as using unique technology-assisted inventory management system. Secondly, VA selects prudent capital investments through appropriated dollars. And lastly, we use an innovative approach to reduce underutilized assets through the enhanced-use authority of both leases and disposals.

Approach # 1: More Effective Management of Assets
VA is committed to four metrics that set the goals for performance. They include the percent of space utilization as compared to overall space (owned and direct leased); the percent condition index (owned buildings); the ratio of non-mission-dependent assets to total assets; and lastly the ratio of operating costs per gross square foot (GSF) adjusting for inflation. These goals are based on the FRPC standards for performance measurement in capital portfolio management. VA is striving to utilize information technology and established capital asset management principles to improve the management of its capital resources. VA created Capital Asset Management System (CAMS), an integrated, Department-wide system, enabling VA to analyze, monitor, and manage VA’s portfolio of capital assets. Data are organized and presented to strategically monitor performance against capital asset goals within and across asset types and VA Administrations (VHA, VBA, and NCA).

Approach # 2: Prudent Investments with Appropriated Dollars
VA uses appropriated dollars to manage CARES capital investment projects that have proven to be prudent investments. Each project is measured by the President’s Management Council and VA performance measures to ensure the best use of our overall portfolio needs. This innovative approach has allowed VA to manage underutilized assets in a more efficient and cost-effective manner.

Approach #3: Enhanced-Use Leasing Authority
Having recognized the need to reduce the number of vacant and underutilized real property assets, over the past 14 years VA has awarded 47 projects through the Enhanced-Use (EU) Leasing authority. This legislation provides the Department a unique asset management authority that allows VA to enter into agreements with non-government entities for the use of VA space or land for private development, resulting in some form of consideration back to VA and to veterans. An additional 100 initiatives are being studied, of which 45 projects are currently “active”.

Enhanced Use Lease Authority was initially authorized in 1991 under Title 38 U.S.C. Section 8161 through 8169 and has been modified and reauthorized until 2011. The EU program provides VA with a proven method of leveraging VA’s diverse real estate portfolio and market position. This authority allows for realignment of under-performing property to produce the “highest and best” return to veterans, taxpayers, and the government.

Traditionally, VA land and buildings were acquired and managed by utilizing appropriated funds. The Enhanced-Use Leasing program has brought significant cost savings, substantial private investment, new long-term sources of revenues, as well as jobs or tax revenues for the local, state and federal sectors.

Below are a few additional examples of successful property portfolio management through enhanced-used leasing.

Minneapolis, Minnesota – Single Room Occupancy (SRO): On September 1, 2005, the Department awarded an enhanced-use lease of approximately 4.341 acres of land on the VAMC campus to the selected lessee/developer, Hennepin County Housing and Redevelopment Authority (HCHRA). HCHRA intends to construct not less than 140 units in 2 existing VA buildings and adequate associated parking, and use existing Building 11 as an administration building. HCHRA would be responsible for the financing, design, construction, renovation, operation, maintenance, and provision of services at the facility. Benefits from the lease include the availability of safe, decent and affordable housing for veterans and others who are in need, storage and office space for VA, as well as significant cost avoidance to VA by reducing reliance on inpatient and domiciliary resources. Such benefits, together with ground rent to VA, will permit more resources to be directed toward direct veteran care.

Leavenworth, Kansas – Mixed-Use Development: On August 5, 2005, VA signed an enhanced-use Lease with Eisenhower Ridge Association (ERA) to renovate 38 underutilized buildings and to adaptively reuse historic properties located on approximately 50 acres of land. This mixed-use development will provide services and accommodations relating to affordable senior housing, long-term care, transitional veterans housing with supportive services, long-term veteran housing, and educational and community support facilities. The project will also result in additional land (without historical buildings) to become available to the Leavenworth National Cemetery for additional gravesites for veterans and for a columbarium.

Chicago (Lakeside), Illinois – Realignment: As previously indicated, on January 18, 2005, VA signed a 75-year enhanced-use lease with Northwestern Memorial Hospital (NMH) for two parcels of land totaling 3.8 acres. This date marks the first time that VA has used enhanced-use leasing to implement a CARES realignment decision and dispose of an unneeded property. VA realized $28 million upon signing the lease and another $22 million upon the property’s disposal. The Lakeside lease will result in a demonstrable improvement of services to eligible veterans by permitting VA to offset the cost of implementing CARES in the City of Chicago and other locations, and avoid the future cost of investing VA’s limited capital funds in aging health care facilities. The lease also will insure the continuation of quality medical care for Chicago area veterans and enhance the Department’s ability to better manage its resources, including the portfolio of Federal real property assets under VA’s control. VA used monetary consideration from the Lakeside enhanced-use lease to fund additional FY 2006 capital improvements.

Tuscaloosa, Alabama – Hospice: On September 22, 2002, VA leased approximately 3.7 acres on the Tuscaloosa VA Medical Center campus to the Hospice of West Alabama (HOWA) for 75 years to finance, design, develop, construct, operate, and maintain a “hospice facility” with not less than 8 beds available to veterans on a priority basis and then to other residents in need of hospice care. VA and veterans benefit in obtaining access to new safe, decent and affordable inpatient hospice care and services to VA-referred veterans who are in need of hospice care.

Chicago (Westside) Illinois – Energy:On August 12, 2002, VA entered into an EU Lease of VA real property to a trust that has secured a developer/operator Energy Systems Group (ESG) to develop and thereafter operate and maintain a state-of-the-art energy center that produces and sells energy to the VAMC with an opportunity to sell energy products to non-VA users. In return, VA receives energy cost savings. North Chicago, Illinois – Energy Phase 1: On May 1, 2002, VA entered into an EU Lease of VA real property to a trust that has secured a developer/operator Energy Systems Group (ESG) to develop and thereafter operate and maintain a state-of-the-art energy center that produces and sells energy to the VAMC with an opportunity to sell energy products to non-VA users. In return, VA receives energy cost savings.

Chicago (Westside) Illinois – Regional Office Collocation:On April 22, 2002, VA leased 4 acres of land on the Westside campus for 35 years to a lessee/developer who would finance, develop, construct, and manage a commercial office building. This agreement enabled VA to collocate the Chicago VA Regional Office on the VA medical center campus to improve delivery of benefit and health care services, reduce costs, enhance VA property and improve access for Illinois veterans and their families. In return, VA receives turn-key office space, with no capital cost. The lessee also provides in-kind services and other benefits as long as VA requires office space.

Chicago (Westside) Illinois – Parking: On April 22, 2002, VA also leased 4 acres of land on the Westside campus for 35 years to a lessee/developer who would finance, develop, construct, and manage a parking garage complex. In return, VA receives vital additional parking at no capital cost. The lessee will also provide in-kind services and other benefits as long as VA requires parking.

Indianapolis, Indiana – Consolidation: On September 6, 1996, VA leased approximately 22.29 acres of the 30 acre Cold Spring Road Division to the State of Indiana. This transaction allowed VA to close the Cold Springs Road Division and consolidate operations at the West Tenth Street Division of the VA Medical Center at Indianapolis. As part of the State’s total rental consideration ($15.7 million) for the property, $9.8 million is provided as revenue to support benefits for the veterans of the State of Indiana and to provide other VA benefits as the Secretary deems necessary elsewhere. The remaining $5.9 million is valued as in-kind consideration which includes property maintenance services to VA.

Land Management Taskforce

With the lessons we have learned in the CARES process, VA is developing a Land Management Taskforce. It is envisioned that this Taskforce will be focused on a top-down review of all underutilized assets and their associated encumbrances. A VA “Site Review Board” will be tasked with steering a full review of all the CARES assets and identifying any and all sites that may have underutilized space. The results of this taskforce will steer the course for future enhanced use leases and revenue-generating projects. This is a unique opportunity to increase the revenue generated from VA’s underutilized assets.

Conclusion

Throughout the process, VA has worked closely with Congress and is committed to keeping members of Congress apprised of VA’s efforts to promote efficient business practices in maintaining real property portfolios. Thank you for your interest in this process, and I appreciate your continued commitment to our veterans. That concludes my statement. I will be glad to respond to any questions that you or Members of the Subcommittee may have.