DoD Housing Pro Describes Privatization Evolution

Despite ever-changing fiscal levels since World War II, the Defense Department has sought to improve and maintain acceptable military installation housing conditions, and privatization remains a linchpin in those endeavors, an official said here Jan. 23.

Joseph K. Sikes, the Defense Department’s former director of housing and competitive sourcing, who began with base realignment and closure before joining the housing privatization office in 1996, recalled the program’s fledgling beginnings over five years.

Privatizing Base Housing

With about 200,000 of the DoD’s 300,000 houses in need of improvement, Sikes described the cultural change for base commanders and the private sector to own, maintain and improve base housing.
“We figured it would take 30 years to replace the houses and if you do that you’d never catch up, because the other ones would go bad and you’d never solve the problem,” Sikes said. “And we suspected it was about a $30 billion problem – which is a big chunk of the DoD budget.”

Members from the Air Force, Army and Navy began to assess the shortage and poor condition of base housing as directed by the centrally-run privatization office in the mid-90s, Sikes said.

“Everybody was furiously analyzing things at bases, but nobody wanted to be the first one out,” Sikes explained. “It was a learning process … so we dissolved the office, developed policy and made the services responsible for getting it underway.”

Upon seeing the successes of the first privatization projects at Fort Carson, Colorado, and Lackland Air Force Base, Texas, commanders soon realized the program could expedite project building and renovations more effectively than conventional military construction.

Subsequently, through the 1997 Authorization Bill, the department was able to transfer properties and grant loans to private sector owners, invest money in projects, and arrange conveyance or leasing of land. The program ultimately generated $31 billion of private capital, with a government investment of only $3.4 billion.

Today, the DoD has privatized more than 200,000 military housing units, including apartments, townhouses and even single family homes.

Looking to the Future

“The true test of housing privatization will be what condition (the homes) are in in 20 years,” Sikes said. “When we started it, all everybody wanted to do was to go take a picture out in front of the ribbon-cutting of the new house.”

But Sikes asserts that it’s necessary to assess how rents flowing into the projects contribute to all of the houses over time, not just what the DoD initially built.

“We need to watch that for the next 15-20 years,” Sikes said. “We do a long-term review of the projects to see what the income streams are like and how much money is being built up in the reinvestment account so they can replace them in the future.”

According to Sikes, about a third of the houses are healthy, particularly those in the coastal regions, because the rents are based on higher allowances. Some houses, he said, are average basic housing allowances while an additional third are remote with lower allowances.

Still, Sikes noted the Army, Navy and Air Force each have good portfolio oversight to monitor reinvestment, but a new threat to the process emerges when the housing money comes from bill-payers.

“When you’re doing the budget and it gets cut, which is amplified now under sequestration, what goes first is the money for the infrastructure,” Sikes said. “The beauty of privatization is that it gets out from under that because the money is coming into the allowance account and so therefore that’s safe.”

That is, until this year, when the DoD had a one percent decrease in basic housing allowances, which he said many expect will continue over time.

“When we started housing privatization there was about a 15 percent plus out of pocket in the allowance accounts,” Sikes said, adding that concurrently the DoD shifted to zero out-of-pocket allowances, which increased the amount of money in the projects and made them healthier. “If we start to go the other way, we can’t let the projects be affected by that -- because if we gradually reduce the income going into the projects, we’ll also reduce the quality of the houses.”

As such, Sikes said the services have all realized that families, not projects will need to absorb the 1 percent decrease. Pentagon officials, therefore, seek to ensure the housing quality is protected and fairly implemented to avoid disproportionate burdens based on DoD decisions relative to the bigger budget.

Ultimately, Sikes praised the “patriotic partners” in privatization, but said he wants to maintain long-term relationships to stabilize portfolios and ensure the agreements remain mutually beneficial for years to come.

(Follow Amaani Lyle on Twitter: @LyleDODNews)