TGC 46-43-Feature Comment.pmd
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TGC 46-43-Feature Comment.pmd

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This material reprinted from THE GOVERNMENT CONTRACTOR appears here with the permission of the publisher,West, a Thomson business. Further use without the permission of West is prohibited.THE GOVERNMENT®CONTRACTORInformation and Analysis on Legal Aspects of ProcurementVol. 46, No. 43 November 17, 2004 years. Originally a five-year pilot program, the MHPIhas been extended to 2012. (Expiration of the programwill not affect completed transactions.) The Govern-Focusment expects to privatize more than 70 percent of ex-isting DOD-owned housing units and, to date, DOD¶ 449 has closed MHPI transactions for more than 35projects involving over 69,000 total units. In addition,there are at least 37 projects, involving more thanFEATURE COMMENT: The Military66,000 total units, currently in the MHPI procure-Housing Privatization Initiativement pipeline.By attracting private-sector financing and exper-The quality of military family housing is crucialtise, the MHPI facilitates quicker, cheaper, and betterto the morale and retention of U.S. militaryrenovation and replacement of on-base housing units.servicemembers. The primary source of housingFor example, a June 2002 U.S. Government Account-for military families is privately owned housingability Office report estimated that, by investing aboutlocated in communities surrounding military in-$185 million in the first 10 MHPI projects, DOD shouldstallations. This reliance on the commercial sec-obtain housing improvements ...

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This material reprinted from THEGOVERNMENTCONTRACTORappears here with the permission of the publisher, West, a Thomson business. Further use without the permission of West is prohibited. THEGOVERNMENT ® CONTRACTOR Information and Analysis on Legal Aspects of Procurement
Vol. 46, No. 43November 17, 2004years. Originally a fiveyear pilot program, the MHPI has been extended to 2012. (Expiration of the program Focus will not affect completed transactions.) The Govern ment expects to privatize more than 70 percent of ex isting DODowned housing units and, to date, DOD ¶ 449has closed MHPI transactions for more than 35 projects involving over 69,000 total units. In addition, there are at least 37 projects, involving more than FEATURE COMMENT: The Military 66,000 total units, currently in the MHPI procure Housing Privatization Initiative ment pipeline. By attracting privatesector financing and exper The quality of military family housing is crucial tise, the MHPI facilitates quicker, cheaper, and better to the morale and retention of U.S. military renovation and replacement of onbase housing units. servicemembers. The primary source of housing For example, a June 2002 U.S. Government Account for military families is privately owned housing ability Office report estimated that, by investing about located in communities surrounding military in $185 million in the first 10 MHPI projects, DOD should stallations. This reliance on the commercial sec obtain housing improvements that would have required tor has proven to be the Government’s least ex approximately $1.19 billion in military construction pensive alternative for lodging military families. funds. SeeMilitary Housing: Management Improve Local community housing, however, is often un ments Needed As the Pace of Privatization Quickens, available, unsuitable, or unaffordable. The De GAO02624 (June 2002). MHPI project developers also partment of Defense therefore provides many are permitted to construct housing in accordance with military families with residences constructed on state and local standards and codes rather than tradi bases. In fact, roughly onethird of military fami tional—and more costly—military construction stan lies reside on military bases, and there are more dards. The MHPI therefore offers an innovative and than 250,000 DODowned housing units world fiscally attractive solution to DOD’s family housing con wide. But at least half of this DODowned hous cerns. ing is in less than desirable condition: the units This article discusses the significant features and are too old, too small, poorly maintained, or lack mechanics of the MHPI. Also addressed are several ing modern features. Moreover, improving the issues that have arisen in legal disputes regarding quality of onbase housing through scarce mili these unique procurements. tary construction appropriations alone will take The MHPI Motor—The central advantage of the too long. To address this worsening situation, ConMHPI is that it allows DOD to obtain new and reno gress in February 1996 passed the Military Housvated housing units at a significantly reduced upfront ing Privatization Initiative (MHPI) as part of thecost to the Government. Developers, of course, do not National Defense Authorization Act for Fiscalprovide their services for free. To make MHPI projects Year 1996, P.L. 104106. The MHPI, which is codiviable, DOD provides an income stream to developers fied at 10 USCA §§ 28712885, is a “publicprivate”mainly in the form of rent paid by, or on behalf of, hous program under which private developers maying unit occupants. Rent is based upon servicemembers’ own, operate, maintain, improve, and assumeBasic Allowance for Housing (BAH), a component of the responsibility for housing located on or near milimilitary compensation system, which is computed based tary installations within the United States andon the median cost of housing in a geographic location, its territories and possessions. MHPI projectspay grade, and whether a servicemember has depen may be awarded for lengthy periods, often for 50dents. BAH therefore is the motor that drives the MHPI. 40143992West, a Thomson business Copyright © 2004
® The Government Contractor 2
Because DOD provides BAH to servicemembers only when Government quarters are not provided— in other words, because DOD provides servicemembers with DODowned housingin lieu ofBAH—the payment of BAH to developers under the MHPI represents an additional cost to DOD, al beit one that is spread out over the life of a project. However, this new expense is more than offset by DOD’s avoidance of construction, renovation, opera tions, and maintenance costs through privatization. All costs considered, it is estimated that DOD over the longterm saves approximately 10 percent through privatizing military housing. The MHPI Toolbox—The MHPI does not es tablish a set of rigid, mandatory rules or procedures. Instead, the MHPI offers an array of flexible tools designed to facilitate real estate transactions with private developers and lenders. Through the selec tive application of one or more of these tools, DOD may tailor each transaction to best meet the site specific housing needs of a particular military in stallation. Conveyances or Leases of Property and Fa cilities—The MHPI authorizes DOD to convey or lease property to “eligible entities” to carry out MHPI activities. Property at military installations approved for closure is excluded. An eligible entity (referred to generically herein as a “developer”) in cludes any private person, corporation, firm, part nership, company, state or local government, or housing authority of a state or local government. DOD also may convey or lease facilities related to military housing units—for example, facilities that provide or support elementary or secondary edu cation, child and day care centers, community cen ters, housing offices, dining facilities, and other similar facilities for the support of military hous ing. The MHPI refers to these facilities as “ancil lary supporting facilities.”  DODexercises broad discretion in determin ing the consideration, terms, and conditions upon which a conveyance or lease of property or facili ties will be made. (As discussed further below, DOD generally does not consider such transactions sub ject to the Federal Acquisition Regulation (FAR) or most federal procurement laws.) Specifically, the MHPI provides that a conveyance or lease shall be for such consideration and upon such terms and conditions as DOD considers appropriate for the purposes of the MHPI and to protect U.S. interests.
In addition to conveying or leasing Government property or facilitiestodevelopers, DOD also is au thorized to lease housingfromcommercial sources. The MHPI provides that such a contract may be for any period that DOD determines is appropriate and may provide for the owner of the leased property to operate and maintain the property. The MHPI also permits DOD to make “differential lease payments” to the lessors of such property. A differential lease payment is an amount paid in addition to servicemembers’ rental payments in order to encour age lessors to make housing available to DOD. Direct Loans and Loan Guarantees—The MHPI authorizes DOD to make direct loans to de velopers in order to provide them with funds to ac quire, construct, or improve housing units or re lated facilities. DOD also is authorized to guarantee loans made to developers if the proceeds of the loan are to be used to acquire, construct, or improve housing units or related facilities. The MHPI re quires DOD to establish such terms and conditions for the direct loans and the loan guarantees as it considers appropriate to protect the interests of the United States. DOD’s authority to make direct loans and guarantee loans is subject to the availability of appropriations and other limitations. It should be noted that, when an offeror’s pro posal for an MHPI project is premised upon a Gov ernment direct loan or loan guarantee (or other Government expenditures), DOD must account for the associated costs to the Government in the evalu ation. Thus, the proposal of direct loans or loan guarantees for larger amounts or with terms less favorable to DOD will likely work to an offeror’s disadvantage in an MHPI competition. Rent and Occupancy Guarantees—The MHPI authorizes DOD to enter into agreements with de velopers in which DOD guarantees a specified level of occupancy or a specified level of income to be de rived from the rental of units. If the occupancy rate drops below a certain level, the developer may be permitted to rent housing units to other person nel—such as federal civil service employees, DOD contractors, and the general public—in an estab lished order of priority. DOD also may provide guarantees, including the making of mortgage or rental payments, in the event of the closure or realignment of an installation, a reduction in force, or an extended deployment. Ancillary Supporting Facilities—As noted
above, DOD may convey or lease to developers ex isting ancillary supporting facilities. The MHPI also provides that a project may include the construc tion of new ancillary supporting facilities by devel opers. Such facilities provide for additional income streams to developers. However, an MHPI project may not include the construction of a new ancil lary supporting facility if it is to be used to provide merchandise or services in direct competition with a military exchange, the Defense Commissary Agency, or a DOD nonappropriated fund activity for the morale, welfare, and recreation of service members. Utilities and Services—The MHPI authorizes DOD to furnish certain onbase utilities and services to developers, including electricity, steam, water, natural gas, mechanical refrigeration, compressed air, sewage and garbage disposal, pest control, snow and ice removal, telecommunications services, and fire and police services. Developers, however, must reim burse DOD for providing such utilities and services. Government Investments in NonGovernment Entities— DOD is authorized to make investments in developers carrying out MHPI projects. Such in vestments may take the form of the acquisition of a limited partnership interest, the purchase of stock or other equity instruments, the purchase of bonds or other debt instruments, or any combination thereof. The amount of any Government invest ment, however, is limited to 33percent of the project’s capital cost or, if DOD conveys land or fa cilities to the developer, 45 percent of the project’s capital cost. MHPI Competitions—In selecting developers for MHPI projects, DOD generally employs what it calls a “nonFAR” competitive solicitation process. Al though DOD asserts that the FAR generally does not apply to MHPI transactions, solicitations for MHPI projects nonetheless may include detailed FARlike procedures. MHPI solicitations may even incorporate certain FAR provisions and clauses. In an April 17, 1997 memorandum, the Office of the Under Secre tary of Defense informed DOD agencies that, under the MHPI, “FAR clauses may be liberally employed even if the FAR does not technically apply.” Although all military services must follow gen eral DOD policy guidelines for MHPI procurements, each service has established its own privatization program. The Navy’s program is called “PublicPri vate Ventures”; the Air Force’s program is called
Vol. 46, No. 43/ November 17, 2004 3
“Housing Privatization”; and the Army’s program is called “Residential Communities Initiative.” The Navy and the Air Force employ a similar twostep procurement process. Step one involves an evalua tion of offeror qualifications and certain other mat ters. In step two, up to five offerors are invited to submit detailed technical and financial proposals, resulting in the selection of a developer for exclu sive negotiations to attempt to close the transac tion. The Army, in contrast, selects a developer based upon responses to a Request for Qualifications and works with the selected developer to craft a Community Development and Management Plan (CDMP) tailored to the installation. If the Army is satisfied with the CDMP and the selected developer, it then issues a notice to proceed to the developer to execute the CDMP. Several legal issues that have arisen regarding MHPI procurements are discussed below. MHPI Protests—Five published bid protest decisions have been issued addressing MHPI pro curements. (There have been no published deci sions addressing MHPI project performance issues such as claims or terminations.) The most signifi cant issue arising in these decisions, and one which has not yet been fully resolved, relates to what fed eral procurement laws, regulations, and principles apply to MHPI competitions. Jurisdiction—The U.S. Court of Federal Claims (COFC) and GAO have readily accepted ju risdiction over MHPI protests. See, e.g.,Hunt Building Company, Ltd. v. United States, 61 Fed. Cl. 243 (2004);North American Military Housing, LLC, Comp. Gen. Dec. B289604, Mar. 20, 2002, 2002 CPD ¶ 69. Before bid protest jurisdiction in the federal courts was consolidated in the COFC in January 2001, one U.S. district court also accepted jurisdiction over an MHPI protest.See Hunt Build ing Corp. v. United States, No. 971706A, 1998 U.S. Dist. LEXIS 23329 (E.D. Va. Jan. 30, 1998). Whether an agencylevel protest is viable, how ever, is unclear. Because DOD maintains that the FAR generally does not apply to MHPI procure ments, and because the authority for agencylevel protests resides in FAR Part 33, it is possible that a protest filed with a DOD agency may not be con sidered, or may be considered as something other than a “protest.” But seeHunt Building Company Ltd. v. UnitedStates, 61 Fed. Cl. 243 (2004) (Air Force considered preaward agencylevel protest).
¶ 449
® The Government Contractor 4
In either case, a subsequent protest to GAO, which has very strict timeliness rules, may be deemed un timely. Timeliness—As with other procurements, an offeror wishing to object to a term in an MHPI so licitation cannot wait to do so until after it submits a proposal. For example, inHunt Building Corp., the plaintiff—following the Army’s exclusion of all but one of fifteen offerors from the competitive range—brought a protest objecting to the Army’s failure to conduct discussions. The court held that the plaintiff was estopped from making such an as sertion because the solicitation had informed offerors that the Army might make an award with out discussions. Cf.Peak Family Housing, Pikes LLC v. United States, 40 Fed. Cl. 673 (1998) (in a subsequent protest regarding the same procure ment at issue inHunt Building Corp., the COFC determined that the plaintiff was entitled to con duct reasonable discovery because there were “three unexplained inconsistencies, at a minimum, between the solicitation process described in the Source Selection Plan and the manner in which this solicitation actually unfolded”);Hunt Building Com pany, Ltd.(rejecting the Air Force’s contention that the protest was an untimely challenge to solicita tion terms because, to the contrary, the protester was seeking toenforceterms that the solicitation agency did not follow in selecting the developer). In addition to arguing that protests are filed too late, agencies or intervenors may argue that MHPI protests are “too early.” For example, inHunt Building Company, Ltd., the intervenor (the se lected developer) asserted that the protest, which objected to a relaxation of material terms in the solicitation’s form legal documents, was premature because the Air Force and the developer had not yet closed the transaction. The COFC, however, found the matter ripe for judicial review because finalization of the legal documents had been com pleted to the extent possible and all that remained to be done was to close the transaction in accor dance with those documents. The COFC also noted that delaying judicial review until after closing could impair the court’s ability to fashion relief. In that regard, the COFC observed that the project’s con tractual instruments did not include termination for convenience clauses. See, e.g.,Shields & Dean Con cessions, Inc., Comp. Gen. Dec. B292901.2 et al., 2004 CPD ¶ 42 (stating in a nonMHPI protest that,
¶ 449
in the absence of a termination for convenience clause, GAO will not recommend termination of an awarded contract, even if GAO sustains the protest and finds the award improper). Applicability of Procurement Laws and Regu lations—In a March 5, 1997 memorandum to the Deputy Under Secretary of Defense regarding the MHPI, the DOD Office of General Counsel con cluded that the FAR would normally not apply where a transaction does not require the obligation of appropriated funds or does not involve the pur chase of goods or services. The memorandum fur ther states that the use of the FAR is not required where DOD is serving as a “facilitator,” marrying a private developer with prospective military hous ing occupants, and is not directly buying or leasing housing for its servicemembers or paying a devel oper to provide such housing. As a result, DOD gen erally does not consider most MHPI transactions as subject to the FAR. One U.S. district court, citing this DOD Office of General Counsel memorandum, concluded that the FAR did not apply to an Army MHPI project. See Hunt Building Corp. Nonetheless, there may be com pelling arguments in favor of the FAR’s applicabil ity to many MHPI transactions. FAR 2.101 defines a covered “acquisition” as meaning “the acquiring by contract with appropriated funds of supplies or ser vices (including construction) by and for the use of the Federal Government through purchase or lease.” MHPI transactions certainly appear to involve the acquisition of services, since developers are required to design, develop, renovate, construct, operate, maintain, and/or manage housing for service members in exchange for an income stream from rent and other sources. SeeRapides Regional Medi cal Center v. Secretary, Dept. of Veterans Affairs, 974 F.2d 565, 574 (5th Cir. 1992) (“the classic procure ment involves the government’s paying money or conferring other benefits in return for the acquisi tion or use of private property or services”). In addi tion, appropriated funds will flow to developers through rent paid by, or on behalf of, service members, whose housing allowances are appropri ated by Congress. Government direct loans and loan guarantees also involve the obligation of appropri ated funds. Given that the COFC and GAO have yet to re solve this issue, it remains an open question as to whether the FAR applies to MHPI procurements
and, if so, to what extent. SeePikes Peak Family Housing, LLC(not reaching the question of whether the FAR governed an Army solicitation for an MHPI project, but stating that it was “notewor thy” that the Source Selection Plan and related Army memoranda unequivocally stated that the Plan was prepared and approved in accordance with the FAR); andHunt Building Company, Ltd.(stat ing that the legal issue of whether the FAR applied to an Air Force MHPI transaction was “a thorny one,” but not necessary to resolving the protest be cause the COFC’s authority to overturn agency ac tions is not limited to violations of statute or regu lation). For similar reasons, it also is unclear whether and to what extent the Competition in Contracting Act of 1984 or other federal procurement statutes ap ply to MHPI transactions.Cf.Hunt Building Corp. (stating that CICA did not apply to an Army MHPI transaction);Hunt Building Company, Ltd.(finding it not necessary to resolve whether CICA applied to an Air Force MHPI transaction). Adherence to Solicitation—Regardless of what federal procurement laws and regulations, if any, apply to a particular procurement, it is quite clear that DOD agencies must conduct MHPI competitions in accordance with the procedures and requirements established in the solicitation. Not surprisingly, an MHPI solicitation will reflect and impose many re quirements that arise from statute and regulation. If a DOD agency fails to conduct an MHPI procure ment in accordance with the solicitation, an offeror may seek redress through a bid protest. For example, inHunt Building Company, Ltd., the COFC sustained the protest because the plain tiff had established three prejudicial violations of the solicitation. First, prior to submission of final proposal revisions, the Air Force agreed to materi ally relax for one offeror a critical termination pro vision in the solicitation’s form property lease. The Air Force, however, did not amend the solicitation or otherwise inform the plaintiff of the change— even though the plaintiff, which was the only other offeror in the competitive range, had requested a similar relaxation to the very same provision. Sec ond, although the solicitation provided that the property lease and other legal documents to be ex ecuted between the Air Force and the selected de veloper would be “substantially identical” to those attached to the solicitation, with revisions permit
Vol. 46, No. 43/ November 17, 2004 5
ted only to finalize administrative details, the Air Force agreed after it selected the developer to ma terially relax several other provisions of the form legal documents. Third, although the solicitation contemplated that selection of a developer, award, and closing would be based upon the selected developer’s final revised proposal, the Air Force, following the selection of the developer, invited it to revise its final revised proposal three times, which the developer did, without affording the plaintiff the same opportunity. See alsoPikes Peak Family Housing, LLC(determining that the plain tiff was entitled to conduct reasonable discovery because there were “three unexplained inconsisten cies, at a minimum, between the solicitation pro cess described in the Source Selection Plan and the manner in which this solicitation actually un folded”); North American Military Housing, LLC, Comp. Gen. Dec. B289604, 2002 CPD ¶ 69 (deny ing protest alleging that the Army improperly ap plied unstated evaluation criteria because the al legedly unstated evaluation criteria were reasonably and logically encompassed by criteria identified in the solicitation); andThe Community Partnership LLC, Comp. Gen. Dec. B286844, 2001 CPD ¶ 38 (denying protest that the Army improp erly excluded protester from the competitive range because the agency’s evaluation was reasonable and consistent with the evaluation factors identified in the solicitation). Fairness and Equal Treatment—It also is clear that DOD agencies must treat all offerors equally and fairly in MHPI competitions. Fair and equal treatment are fundamental principles inherent in anyprocurement. See, e.g., federalDubinsky v. United States, 43 Fed. Cl. 243 (1999) (noting “the deeplyingrained principle that ‘all procurements... must be conducted consistent with the concern for a fair and equitable competition that is inherent in any procurement’ ”);Finlen Complex, Inc., Comp. Gen. Dec. B288280, 2001 CPD ¶ 167 (“basic prin ciples of fair play are a touchstone of the federal procurement system, and those principles bound even broad grants of agency discretion”). Accord ingly, inHunt Building Company, Ltd.,the COFC stated that the Air Force’s issuance of a solicita tion for an MHPI project and the offerors’ submis sion of responsive offers created an impliedinfact contract requiring fair dealing on the part of the Government. The COFC therefore had a legal ba
¶ 449
® The Government Contractor 6
sis to sustain an MHPI protest “independent of any statutory or regulatory violations.” Conclusion—As the authors of this article can attest, the new and renovated housing units being made available to military servicemembers through the MHPI are a significant improvement over ex isting housing conditions at many military instal lations. Certain legal issues regarding these unique procurements remain unresolved and likely will require further development. Nonetheless, the po tent efficacy with which the MHPI is quickly and efficiently rectifying DOD’s family housing concerns is an undeniable and impressive achievement. This FEATURECOMMENTwas written for THEGOVERNMENTCONTRACTORbyJames J. McCullough, Deneen J. Melander,andSteven A. Alerding. Mr. McCullough and Ms. Melander are part ners and Mr. Alerding is an associate in the Washington, DC office of Fried, Frank, Harris, Shriver & Jacobson LLP.
¶ 449