Perspective: The Military Housing Privatization Initiative is at Risk

By Paula Cino, NMHC

Last year, Congress failed to reach a federal deficit and spending agreement, triggering the massive budget cuts known as sequestration. Across the board, departments were affected, not the least of which was the Department of Defense (DoD), which was required to slash its budget by almost $500 billion over the next decade. While subsequent budget negotiations have provided some short-term relief to the DoD, military leaders are evaluating options for cost savings.

Officials have repeatedly described military compensation and personnel costs as unsustainable, and the DoD announced it would consider changes, including a potential reduction, to the Basic Allowance for Housing (BAH). The monthly allowance is given to service members to cover housing costs. In FY2012, DoD spent roughly $20.1 billion on housing allowances for military personnel.

A BAH drawdown would limit housing options and increase the out-of-pocket housing expenses for nearly one million troops across the country. In turn, this would widely affect the apartment sector—including privatized military housing providers, investments made in proximity to military installations and any apartment properties with military residents.

Target on privatized military housing
The privatization of military housing began in 1996 to address a severe backlog in the availability and adequacy of government housing for military service members. The limited stock and often poor quality of military housing threatened troop readiness, morale and retention. The Military Housing Privatization Initiative (MHPI) leveraged private-sector capital, as well as housing industry expertise in construction and management, to reverse the military’s housing deficiency. Today, the program is a sterling example of successful public-private partnership. As of 2012, 193,000 family housing units were privatized compared with 53,000 government-owned units.

The BAH is a core element of the MHPI program that compensates service members for housing costs and offers flexibility in housing choice. Designed to reimburse military personnel for 100 percent of their housing expenses, the BAH rate is tied to the market rents in a duty location, among other factors such as rank and whether the service member has dependents. Because service members have the option of using their BAH to pay for on-base privatized military housing, off-base rental housing or mortgage payments on a house purchase, the effects of a modification will ripple across both the rental and for-sale sectors of the housing market.

Potential amendments to the program could take several forms including an across-the-board rate decrease of five to fifteen percent or a progressive reduction based on criteria like personnel rank. Some military officials have voiced concerns that even a more measured approach such as a BAH rate freeze could still seriously impair the MHPI program, since initial investment decisions were predicated on at least modest increases in BAH.

Effects could also hit the industry’s rank and file
Within the apartment industry, owners and managers of privatized military housing projects will feel the biggest pinch from a BAH reduction. Since the rent collected on privatized projects cannot exceed the BAH, a BAH reduction could negatively affect revenue streams for participating firms. Less potential revenue can undermine financial and business assumptions and drive some firms to make operating adjustments, such as scaling back property services and amenities. In addition, insufficient revenue can drain reserve accounts needed to fund future maintenance and community improvement projects. Funding shortfalls also threaten the project owner’s ability to meet debt service obligations and can impair recapitalization efforts.

Moreover, these conditions jeopardize the long-term stability of the housing privatization project. Military service members are not required to reside in privatized projects and housing providers receive no occupancy guarantees. Without the financial ability to maintain or improve community features, privatized projects are at a competitive disadvantage compared to off-base apartment properties.

However, the negative effects of a broad-based reduction to the BAH will extend beyond privatized military housing providers. About two-thirds of armed services personnel live outside military installations in purely private-sector housing. Any cutback to the BAH will diminish the funds service members have available for housing expenses. In markets serving military populations, apartment firms could face downward pressure on rent rates or occupancy challenges as service members seek lower-cost housing options.

Changes to the BAH also can damage the local community itself and create an economic drag. Apartments and their residents are significant economic drivers in their neighborhoods, with the average apartment resident generating $51,831 in total economic activity every year through the purchase of goods and services. This spending powers local economies as roughly 70 percent of dollars spent stay in the immediate community, according to research by Stephen Fuller, Ph.D., a professor and director of the Center for Regional Analysis at George Mason University. Moreover, the ongoing operations and maintenance of the apartment properties in which those residents live also support significant spending and job creation in their communities.

Volatility in BAH allocations can have a profound impact on the housing decisions of military service members, as well as the investment and management activities of apartment providers. As the DoD commits to specific budget reductions, it’s important to consider the effects of BAH changes on the success of the MHPI program, as well as the wide range of housing businesses that serve military communities.

Transition to privatized housing
The inventory of privatized military housing units has grown with the success of the Military Housing Privatization Initiative (MHPI) and now accounts for nearly four times the number of government-owned family housing units.

Source: Department of Defense, 2012
Note: Deficit reduction units refer to the housing deficits resulting from the realignment and relocation of military members and their families due to the Base Realignment and Closure (BRAC) program, global repositioning of forces, the Army’s modularity program and Grow the Force initiatives. The scope of current privatization projects includes the construction of more than 14,000 new privatized housing units to reduce the existing family housing deficit.

Paula Cino is senior director of energy and environmental policy for the National Multifamily Housing Council in Washington, D.C. She can be reached at pcino@nmhc.org.