In 1996, Congress authorized the Military Housing Privatization Initiative (MHPI) to improve the condition and quality of the Department of Defense’s (DoD) housing inventory, which had deteriorated due to inadequate new construction and maintenance funding. That year, the DoD identified 180,000 inadequate housing units in need of renovations or replacement. The military faced a $20 billion housing maintenance backlog that would take 30 years to resolve using the traditional methods of contracting and construction. The dire state of military housing severely impacted readiness by creating recruitment and retention challenges.
The MHPI allowed private companies specializing in development and property management to work with the Armed Services to obtain nearly $30 billion in initial private sector funding to address this backlog. Those funds were raised though privately placed bonds, which are held by institutional lenders across the country. Each of the services structured their partnerships to meet their respective needs. All partnerships were subjected to a competitive submission process and include continued oversight and control by the Services. Today, Military Housing Partnerships own and operate 99% of military family homes on installations across the country.
Basic Allowance for Housing: How It Works
The Basic Allowance for Housing (BAH) underpins the MHPI program. Almost two-thirds of military families in the U.S. live in local housing and receive BAH to help pay for the cost of renting or owning a home. DoD sets the amount of BAH annually, which is calculated by pay grade, dependency status, and geographic duty location. The allowance gives service members fair housing compensation based on rental costs in local markets. Service members have the option of applying their BAH towards the purchase of a new home and can spend more or less than their BAH on housing. The financial stability of each unique military community investment is largely dependent on revenue sourced from BAH.
Tenant Waterfall Policy: Providing Financial Stability
DoD established the Tenant Waterfall Policy, a risk mitigation tool located in the Ground Lease, to give member companies the ability to maintain occupancy rates and financial stability. The Waterfall Policy allows the public to participate in the program when service member declines and force realignments stress the economic conditions of military communities. Upon activation of the Waterfall Policy, five tiers become eligible to participate in the MHPI in the following order: unaccompanied military personnel, active National Guard and Reserve, military retirees, federal government civilians, and civilians. The Waterfall Policy allows MHPI members to maintain financial viability in each project, ensuring the program is positioned to benefit military families as the nation’s force structure changes over time.
The Reasons Why:
- In the early 1990’s, the DoD had a multi-billion dollar backlog in maintenance and repair of its Family Housing (FH).
- Weapon modernization programs and force structure increases caused significant budget pressure on the family housing budget accounts. The DoD did not have a sustainable plan (O&M, SRM, and recapitalization) for its FH.
- The poor condition of FH was among the top reasons why Military Members were leaving the Service. Housing conditions created a recruitment and retention challenge for the Services.
- In 1996, Congress passed the Military Housing Privatization Initiative (MHPI) authorities to address operations, recapitalization, and maintenance and repair challenges.
- Military Housing Privatization Initiative (MHPI) Act of 1996 – 10 USC 2871 – provides the military Services with alternative authorities for the management and operations, construction and improvement of military housing (FH and Unaccompanied Housing (UH).
- Section 2801 of the National Defense Authorization Act for Fiscal Year 1996 created the MHPI as a 5-year pilot program.
- MHPI was originally centralized under DoD, but the lack of Department expertise in housing slowed implementation of the program. In 1998, DoD gave operational responsibility to each Service Branch. OSD Directorate of Housing and Competitive Sourcing was given oversight and final project approval authority.
- Each of the Military Departments structured their programs differently, but they are conceptually the same. The Army calls their program the Residential Communities Initiative (RCI). The Navy calls their program Public Private Venture (PPV) while the Air Force uses Housing Privatization (HP).
- MHPI provides for quality housing for DoD service members and their families as well as single service members at 150 installations
- There are 80 projects managed by 14 MHPI partners.
- There are over 200,000 privatized FH units.
- DoD: Oversight is provided out of OASD (Sustainment), Facility Management Office.
- Services: In general the Assistant Secretaries for Installations and Environment (I&Es), and Assistant Chiefs of Staff/CNO provide the policy, while the Installation Management Commands, NAVFAC, and AFCEC provide the program oversight for the Departments. Garrison/Installation/Base commanders and their staff provide for the oversight of the day to day execution and provide resident advocacy.
How MHPI Works – The Fundamentals:
- MHPI projects are private sector/market driven businesses established as Limited Liability Companies or Limited Partnerships (LLC/LP) single purpose entities.
- DoD has leveraged $4 billion of government investment for a total investment of $32 billion.
- Basic Allowance for Housing (BAH) is the primary source of revenue for each MHPI Project.
- MHPI Partners use rental revenues to pay operating expenses, debt (loan) and capital repair and replacement.
- MHPI Partners reinvest cash flow and returns from partnerships back into the program, which are available for Service Branches to use at their discretion.
- In order to leverage private debt and capital, MHPI established LLC/LP where the Private Sector Partner serves as the majority managing member ensuring performance objectives are met. The Military Services generally serve as the minority member.
- The DoD out-leases assets and land for 50 years with a 25-year option under a Ground Lease and transfers the ownership of housing and improvements to the MHPI Project Company.
- Office of Management & Budget guidance precludes the Services from mandating assignment to privatized housing (Exception: Key and Essential).
- The Managing Member (MHPI Partner), as members, takes on the financial risk inherent with each MHPI Project.