Federal Real Estate's Negative Impact of Scoring on VA Clinics and other Health-related Facilities
The way in which the federal government acquires space (acquisition via a lease or lease construction) has contributed to the current scandal over patient delays at Veterans Affairs health facilities? The problem is severe and the key contributing factor is the lack of space for providers to see patients. Once the top levels of VA leadership begins to emphasize this need by directing their staff to submit proposals to lease additional space, they will find that executing leases for these space needs will cost much less than the levels requiring approval by Congress or the VA Secretary. This action could allow for more patients being seen shortly after modest renovations are made to the space.
However, actions by the Office of Management & Budget (OMB) have caused the VA to suspend approval of all new leases. Since 1983, OMB has approved GSA's delegated leasing authority to the VA for medical facilities. As recently as a couple of months ago, the VA could have projects without GSA involvement. The ongoing debate about whether large leases should be considered operating or capital leases, along with concern over the visibility of leases by other agencies using this authority, lead OMB to direct GSA to halt all VA leases.
The root cause of OMB's actions can be found in the "scoring rules" ( The criterion by which federal leases are classified as either operating lease purchase leases. These rules, archaic as they may be are, in fact subjective and outlined in the Office of Management and Budget's OMB Directive A-11. One positive congressional action that could provide a long-term solution to the VA crisis is to revamp the scoring rules, more specifically, get rid of the "90 percent test," in which the net present value (NPV) of the net lease payments for the length of 16 years or longer exceeds 90 percent of the fair market value of the underlying real property as of the start date of the lease.
Why lease in the first place? Well, if you can't afford to buy, which the federal government cannot because it doesn't have the money, then you must lease and in the absence of extremely favorable financing, which the government could only gain from itself, it's nearly impossible for a VA lease construction (build-to-suit) project that has a 20-year lease to score as an operating lease.
The 90 percent test has been the benchmark criterion for whether a lease or lease-construction project is classified as an operating versus capital lease, and the wholesale use of 20-year leases on the part of the VA for virtually all new and proposed lease-construction projects has caused the Congressional Budget Office (CBO) to declare a halt to the agency's long-term development and replacement program for the aging inventory of VA clinics and other health-related facilities; not equates to not enough clinics and little or no care.
The legislation that created the scoring rule, which was primarily meant for DOD and GSA now has the unintended consequence of affected how the VA built it's healthcare facilities. What the CBO pundits failed to understand is that VA clinics and other health-related facilities are fundamentally different from GSA office buildings and DOD administrative and general-purpose structures in ways that permit such projects to meet the various criteria required for scorekeeping as operating leases, even for lease terms of as long as twenty years (the longest lease term statutorily permitted under present law)
The important thing to note is that the VA Office of General Counsel have carefully reviewed and concur in this determination, but even more important, so have the long succession of OMB examiners who have independently reviewed every such proposed project that OMB by law is required to approve before procurement can proceed.
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The over-riding reason that this type arrangement is the best one possible is because it provides 20-year health facilities to our veterans and their families at the lowest possible cost to the American taxpayers. First and foremost, the longer and firmer the term of the lease, the lower the borrowing rate and less costly are the overall financing costs of the project. A twenty-five basis point difference in interest rates between a ten- and twenty-year lease/mortgage term on a smaller $20 million facility is roughly $50,000 a year, and over twenty years and many hundreds of facilities, large and small, the magnifier effect can be of enormous size. This is almost a mute point, because both short and long term leases have been stalled recently, while OMB, GSA and the VA work on a solution that could take weeks or months to implement.
Bureacratic delays should not prevent my fellow veterans from receiving the care that they have earned through their sacrifice. Now is the time for our nations leaders to fix the problems that exist in OMB rule-making, which is a huge part of the reason facilities are not being leased or built to care for our nation's heroes and the capacity to meet our healthcare needs have dropped to embarrassingly low levels. This problem demands swift action by OMB, which has stalled critical VA Medical Center build-to-suit construction projects and halted VA's leasing authority. Veterans now know and understand that OMB scoring rules are negatively impacting the rate at which facilities can be leased or modern facilities being built.
The question to ask is a simple one: Who is REALLY behind VA's leasing authority being frozen and projects being stalled or not completed at all? I believe that we begin to answer the bigger question when our leaders take a peak behind the OMB firewall. If the OMB's scoring rules need to be changed and other outstanding impediments to real progress need to be resolved, then there's no better and more important time to get it done.
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