The General Accountability Office has issued a new report on the Military Housing Privatization entitled “Housing Privatization: DOD Faces New Challenges Due to Significant Growth at Some Installations and Recent Turmoil in the Financial Markets.” The report finds that several force structure and infrastructure initiatives are compounding DOD’s and the developers’ challenges in ensuring that affordable and adequate military family housing will exist when needed. However, the services are acting to mitigate the challenges. DOD is implementing base realignment and closure recommendations, returning some military forces based overseas to defense installations in the United States, converting Army units to modular brigade combat teams under the Army modularity initiative, and increasing the size of the Army and Marine Corps force structure. Several factors stemming from the recent turmoil in the financial markets have reduced available funds for home construction, resulting in a larger proportion of renovations relative to new construction and reduced scope and amenities at some newly awarded military family housing privatization projects. First, developers have had to pay higher interest rates recently as a result of a reduced pool of investors interested in purchasing military housing privatization bonds and more restrictive underwriting criteria for the remaining investors, resulting in these developers having less money to spend on new construction or renovation. OSD and service officials report that due to the credit rating downgrades of firms that insure bonds are causing developers to have to set aside cash in reserves to help provide assurances that the project’s debt will be repaid in the event the developer cannot make debt payments and alternatives to cash funding are no longer available to satisfy debt service reserve requirements. This in turn is reducing the amount of funds available for construction, according to defense officials. Additionally, current turmoil in the financial markets has resulted in lower returns on investment from the developers’ holding of project funds in various interest-earning investments until needed for construction. Since interest earnings is one of the sources of revenue that provide income to the project to pay for operations, construction, and future recapitalization, lower-than-anticipated interest earnings can affect the financial health of a project.  read more…