WEB FEATURE: Privatization of Military Housing: a PPP Success Story
- Jun 22, 2011
In 1996 Congress passed the Military Housing Privatization Initiative (MHPI) as a way to utilize the private sector in developing and managing military housing. The idea was that private companies could find financing faster, build and make renovations more efficiently, and maintain physical assets at a higher standard than the government. It has been a big success.
Before MHPI, the military housing sector would have to petition Congress annually for funds, which turned building or renovating into a slow, piecemeal process. And of course, every time Congress gave out money, that came from taxpayers. With MHPI, private project owners/developers lease the land from the government under a 50-year partnership, with a 25-year extension option. From there, the private developer owns and operates the physical assets. Service members receive a monthly stipend to pay for housing, and they get to choose where they want to live.
“Just as in a typical market-rate apartment community, the developer goes out and takes those dollars that they receive in rent—less all of the operating expenses and so forth—and sees how much bigger they can make that set of dollars,” Toby Booker, vice president of business development at Balfour Beatty, tells MHN. “We go out and we leverage the capital markets to generate more proceeds to then go out and do the necessary renovations, replacements and maintenance.”
“The Military Housing Privatization Initiative solved the Department of Defense’s funding dilemma,”Bill Mulvey, communications vice president with Picerne Military Housing, tells MHN. “It erased the billions of dollars worth of deferred and backlogged maintenance, replaced inadequate housing and made up the shortfall in available housing on military installations.” The gaps in funding from which public endeavors suffer are no longer an issue, and private companies are accomplishing in three to five years what it once took the government 30 to do.
Ronald J. Hansen, president of Michaels Military Housing, says that the quality of military housing has increased significantly. “The level of renovations of existing homes went from painting and maybe some new flooring, cabinets and countertops to total reconfiguration,” Hansen tells MHN. “The level of effort that everybody in the industry is putting out, because of the competition, has gotten dramatically enhanced.”
No new assignments
The competition for these projects has indeed been competitive. A project may get 10 to 20 bidders, half of which are already successful developers of privatized military housing. However, by the end of this summer, MHPI will be complete, as the last remaining assignments will have been awarded by then. Owners will continue operating their properties through their 50-year agreements, but no new enterprises are slated.
“As the programs move from their initial development period into the out-years, the work does not stop, as the maintaining and replacing of homes to keep the inventory in like-new condition and desirable to military families is critical to the long-term success of MHPI,” Mulvey says.
Even though these assignments have been handed out and private hands are already in control of these communities, revenue is still contingent on government budgeting. “The biggest challenge coming down pike is the uncertainty of what’s going to happen with the Department of Defense with the current budget crisis that the United States is going through,” Hansen says. As military operations expand and contract, these private actors take on the risk of whether their bases will continue to be operational.
“When you’re standing there with $200 million worth of bonds on a base and then worry whether the Department of Defense can say, we no longer need the base, which would also mean they no longer need the housing, is a risk,” Hansen says. “It’s not just us, it’s also local communities near bases. It’s a very significant process that I know the Department of Defense does not take lightly.”
Distant cousin to student housing
Some compare military housing to student housing, in that both niches involve unusual leasing parameters, community-oriented management, and a generally young resident base that is immersed in social media. As one example, in both sectors it’s not uncommon to have residents submit maintenance requests through Facebook.
“Military housing has components very similar to student housing,” Hansen says. “The idea of having social programs along with providing housing has become commonplace. So the number of events at any installation could be five to 10 events a month happening for the residents and their families. I think that didn’t exist before, and a standard property manager doesn’t necessarily have that same level of involvement in the family life of their residents—probably closer to what student housing is in the social programs that are offered for students.”
Building a sense of community is important in an environment where a spouse may be deployed and the family is left behind. There is a support system there, where soldiers of similar rank are usually grouped together and their families become close. Hansen adds, “You’re operating on a federal reserve, so you have things that happen on federal installations that don’t happen in the normal property management scheme—access controls during periods of tension, security aspects that sometimes close the base down.”
The success of MHPI has opened industry experts’ eyes to possibilities both within and without military housing. Mulvey says that Picerne sees a lot of room for improvement when it comes to housing soldiers who live alone. “There is great inequality between the housing available on an installation for military families and the housing available for single service members.” Picerne built 312 luxury apartment units for senior unaccompanied soldiers two years ago, and they filled up as soon as they were built.
Looking outside the sector, the team at Balfour Beatty thinks that the success of MHPI speaks volumes about the potential for other public-private partnerships in the United States. In the United Kingdom, Balfour Beatty is involved in private financing initiatives for hospital and medical facilities, primary and secondary education buildings, and infrastructure projects, and they see no reason why that model can’t be applied in the States. The company is exploring areas where public needs could benefit from private investment, ownership and expertise in the same way that military housing has benefited.