B-121884, DEC 3, 1954

B-121884: Dec 3, 1954

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INC.: THERE IS BEFORE THIS OFFICE FOR CONSIDERATION THE MATTER OF YOUR COMPANY'S REFUSAL TO PERMIT REPRESENTATIVES OF THIS OFFICE TO EXAMINE YOUR RECORDS SHOWING THE CONSTRUCTION COSTS OF TWO WAREHOUSE BUILDINGS AND APPURTENANCES THERETO LEASED TO THE GOVERNMENT UNDER A NEGOTIATED LEASE NUMBERED GS-03-B-169. SUCH EXAMINATION IS NECESSARY FOR AUDIT PURPOSES IN DETERMINING THE LEGALITY OF THE RENTAL PURSUANT TO THE REQUIREMENTS OF SECTION 322 OF THE ECONOMY ACT OF JUNE 30. WITH THE UNDERSTANDING THAT IF THE RENTALS ARE NOT SO SUPPORTED THEY WILL BE REDUCED TO THE MAXIMUM AMOUNT ALLOWABLE. UNDER THE SAME PARAGRAPH THE LESSOR IS REQUIRED AT ITS OWN EXPENSE TO FURNISH FAIR MARKET VALUE APPRAISALS BY THREE INDEPENDENT REPUTABLE APPRAISERS.

B-121884, DEC 3, 1954

PRECIS-UNAVAILABLE

PARR WAREHOUSE COMPANY, INC.:

THERE IS BEFORE THIS OFFICE FOR CONSIDERATION THE MATTER OF YOUR COMPANY'S REFUSAL TO PERMIT REPRESENTATIVES OF THIS OFFICE TO EXAMINE YOUR RECORDS SHOWING THE CONSTRUCTION COSTS OF TWO WAREHOUSE BUILDINGS AND APPURTENANCES THERETO LEASED TO THE GOVERNMENT UNDER A NEGOTIATED LEASE NUMBERED GS-03-B-169, DATED AUGUST 14, 1952. SUCH EXAMINATION IS NECESSARY FOR AUDIT PURPOSES IN DETERMINING THE LEGALITY OF THE RENTAL PURSUANT TO THE REQUIREMENTS OF SECTION 322 OF THE ECONOMY ACT OF JUNE 30, 1932, 47 STAT. 412, AS AMENDED (40 U.S.C. 278(A)), LIMITING RENTAL PAYMENTS TO 15 PER CENTUM OF THE FAIR MARKET VALUE OF THE LEASED PREMISES AT DATE OF THE LEASE.

PARAGRAPH 7 OF THE LEASE PROVIDES FOR AN ANNUAL RENTAL OF $900,000 FOR THE INITIAL TERM. PARAGRAPH 15 PROVIDES THAT THE RENTALS SPECIFIED IN PARAGRAPHS 7 AND 17 SHALL BE SUBJECT TO THE ESTABLISHMENT OF THE FAIR MARKET VALUE OF THE LAND AND IMPROVEMENTS AT DATE OF THE LEASE SUFFICIENT TO COMPLY WITH THE 15 PER CENTUM REQUIREMENT OF SECTION 322 OF THE ECONOMY ACT OF JUNE 30, 1932, AS AMENDED (40 U.S.C. 278(A)), WITH THE UNDERSTANDING THAT IF THE RENTALS ARE NOT SO SUPPORTED THEY WILL BE REDUCED TO THE MAXIMUM AMOUNT ALLOWABLE. ALSO, UNDER THE SAME PARAGRAPH THE LESSOR IS REQUIRED AT ITS OWN EXPENSE TO FURNISH FAIR MARKET VALUE APPRAISALS BY THREE INDEPENDENT REPUTABLE APPRAISERS, ONE NAMED BY THE GOVERNMENT, ONE BY THE LESSOR AND THE THIRD BY THE FIRST TWO, WHICH APPRAISALS MAY BE USED BY THE GOVERNMENT IN DETERMINING THE FAIR MARKET VALUE.

PARAGRAPH 16(A) PROVIDES AS FOLLOWS:

"16. EXAMINATION OF RECORDS - (A) THE CONTRACTOR AGREES THAT THE COMPTROLLER GENERAL OF THE UNITED STATES OR ANY OF HIS DULY AUTHORIZED REPRESENTATIVES SHALL, UNTIL THE EXPIRATION OF THREE YEARS AFTER FINAL PAYMENT UNDER THIS CONTRACT, HAVE ACCESS TO AND THE RIGHT TO EXAMINE ANY DIRECTLY PERTINENT BOOKS, DOCUMENTS, PAPERS, AND RECORDS OF THE CONTRACTOR INVOLVING TRANSACTIONS RELATED TO THIS CONTRACT."

UNDER 16(B) THE LESSOR IS OBLIGATED TO INCLUDE A PROVISION SIMILAR TO 16(A) IN ALL ITS SUBCONTRACTS.

IN JUSTIFICATION OF THE RENTAL STIPULATED IN THE LEASE THE RECORDS OF THE GENERAL SERVICES ADMINISTRATION SHOW THAT THREE APPRAISALS, RANGING FROM $6,534,400 AND $7,074,800, WERE FURNISHED BY YOUR COMPANY AND THAT IN EACH INSTANCE THE BUILDINGS AND CERTAIN RELATED ITEMS, COMPRISING OVER 90 PERCENT OF THE APPRAISED VALUE OF THE ENTIRE LEASEHOLD, WERE APPRAISED AT THE IDENTICAL FIGURE OF $6,403,000, DERIVED IN THE MAIN FROM AN ESTIMATED CONSTRUCTION COST OF $5 PER SQUARE FOOT BASED ON DRAWINGS, PLANS, AND SPECIFICATIONS FOR THE BUILDINGS.

FOR THE PURPOSE OF AUDITING THE RENTAL PAYMENTS UNDER THE LEASE THE REGIONAL DIRECTOR, DIVISION OF AUDITS OF THIS OFFICE AT SAN FRANCISCO, REQUESTED THAT YOUR COMPANY MAKE AVAILABLE TO THAT DIVISION FOR EXAMINATION ITS BOOKS AND RECORDS RELATING TO CONSTRUCTION COSTS OF THE TWO BUILDINGS AND THEIR APPURTENANCES. IN REPLYING TO SUCH REQUEST YOUR ATTORNEY IN LETTER OF SEPTEMBER 13, 1954, CONTENDS THAT PARAGRAPH 16 OF THE LEASE DOES NOT OBLIGATE THE LESSOR TO MAKE SUCH RECORDS AVAILABLE TO THIS OFFICE; THAT SECTION 304 OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, 63 STAT. 395, AS AMENDED BY THE ACT OF OCTOBER 31, 1951, 65 STAT. 700 (41 U.S.C. 254(C)), HAS NO APPLICATION TO LEASING TRANSACTIONS OF THIS KIND; THAT THE GOVERNMENT HAS BOUND ITSELF TO AN UNDERSTANDING THAT THE CLAUSE APPLIES ONLY TO RECORDS PERTAINING TO LEASING OPERATIONS, INCLUDING ALL EXPENSES OF OPERATING, MAINTAINING AND LEASING THE PREMISES, BUT NOT TO CONSTRUCTION COSTS. SUCH CONTENTION IS BASED UPON LETTER OF AUGUST 15, 1952, FROM THE REGIONAL COUNSEL OF THE GENERAL SERVICES ADMINISTRATION, ACKNOWLEDGING RECEIPT OF LETTER OF AUGUST 14, 1952, FROM MR. GLASSIE (YOUR WASHINGTON ATTORNEY). THE LETTER OF AUGUST 14 STATED THAT YOUR COMPANY WAS WILLING TO EXECUTE THE LEASE ONLY UPON THE UNDERSTANDING THAT PARAGRAPH 16 DID NOT RELATE TO CONSTRUCTION COSTS OF THE BUILDINGS OR, IN OTHER WORDS, THAT YOUR COMPANY WOULD NOT BE REQUIRED TO GIVE THE COMPTROLLER GENERAL ACCESS TO ITS BOOKS AND RECORDS INSOFAR AS THEY RELATE TO SUCH COSTS AND THAT IT WOULD NOT BE REQUIRED TO INSERT ANY CLAUSE IN ITS CONTRACTS OR SUBCONTRACTS - MADE OR TO BE MADE FOR THE ORIGINAL CONSTRUCTION OF THE BUILDINGS - GIVING THE COMPTROLLER GENERAL ACCESS TO THE BOOKS AND RECORDS INCIDENT THERETO.

WITH RESPECT TO YOUR ATTORNEY'S STATEMENT TO THE EFFECT THAT GENERAL SERVICES ADMINISTRATION CONCURRED IN HIS CONSTRUCTION OF THE "EXAMINATION OF RECORDS" PARAGRAPH, THE ADMINISTRATIVE OFFICE HAS REPORTED THAT IT HAS NO KNOWLEDGE OF SUCH CONCURRENCE. THE REGIONAL COUNSEL REPORTS THAT YOUR ATTORNEY'S LETTER OF AUGUST 14, 1952, WAS PRESENTED IN PERSON TO THE REGIONAL DIRECTOR WHO SENT IT ON TO THE REGIONAL COUNSEL WITH A NOTATION THAT MR. GLASSIE DESIRED AN IMMEDIATE ACKNOWLEDGEMENT. THE REGIONAL COUNSEL'S LETTER OF AUGUST 15, 1952, MERELY ACKNOWLEDGED RECEIPT OF MR. GLASSIE'S LETTER OF AUGUST 14, 1952. THE REGIONAL COUNSEL STATES THAT HIS LETTER OF AUGUST 15, 1952, WAS NOT INTENDED TO BIND THE GOVERNMENT TO MR. GLASSIE'S CONSTRUCTION OF THE "EXAMINATION OF RECORDS" PARAGRAPH AND COULD NOT HAVE BEEN SO REGARDED AS HE, THE REGIONAL COUNSEL, WAS NOT THE CONTRACTING OFFICER.

THE ACT OF OCTOBER 31, 1951, REFERRED TO ABOVE, REQUIRES THAT ALL CONTRACTS NEGOTIATED WITHOUT ADVERTISING UNDER THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, 63 STAT. 377, SHALL INCLUDE A CLAUSE TO THE EFFECT THAT THE COMPTROLLER GENERAL, OR ANY OF HIS DULY AUTHORIZED REPRESENTATIVES, SHALL UNTIL THE EXPIRATION OF THREE YEARS AFTER FINAL PAYMENT HAVE ACCESS TO AND THE RIGHT TO EXAMINE ANY DIRECTLY PERTINENT BOOKS, DOCUMENTS, PAPERS, AND RECORDS OF THE CONTRACTOR OR ANY OF HIS SUBCONTRACTORS ENGAGED IN THE PERFORMANCE OF AND INVOLVING TRANSACTIONS RELATED TO SUCH CONTRACTS OR SUBCONTRACTS. SEE ALSO GENERAL SERVICES ADMINISTRATIVE ORDER NO. 115, DATED DECEMBER 21, 1951, PROMULGATED PURSUANT TO THE ACT OF OCTOBER 31, 1951.

EVEN IF THE "UNDERSTANDING" IN YOUR ATTORNEY'S LETTER OF AUGUST 14, 1952, HAD BEEN AGREED TO BY THE CONTRACTING OFFICER, IN VIEW OF THE EXPRESS REQUIREMENT OF THE STATUTE AND THE REGULATIONS ISSUED PURSUANT THERETO, SUCH "UNDERSTANDING" COULD NOT OPERATE TO PRECLUDE THIS OFFICE FROM EXERCISING THE RIGHT CONTEMPLATED BY THE ACT OF OCTOBER 31, 1951, AND GRANTED BY THE CONTRACT, SINCE IT IMPOSES NO DISCRETION IN THE CONTRACTING OFFICER OR ANY OTHER ADMINISTRATIVE OFFICER OR EMPLOYEE TO MODIFY OR WAIVE SUCH REQUIREMENT. FURTHERMORE, THE VERY PURPOSE OF THE STATUTE WAS TO ENABLE THIS OFFICE TO DETERMINE WHETHER CONTRACTS ARE BEING NEGOTIATED IN THE PUBLIC INTEREST AND WHETHER THE PUBLIC FUNDS OBLIGATED THEREUNDER ARE BEING PROPERLY AND LEGALLY SPENT. CONSEQUENTLY AND IN VIEW OF THE RENTAL LIMITATION IMPOSED BY THE ECONOMY ACT, THIS OFFICE MUST INSIST UPON EXAMINING THE CONSTRUCTION COSTS OF THE LEASED BUILDINGS. YOU ARE REQUESTED TO ADVISE THIS OFFICE WITHIN THIRTY DAYS WITH RESPECT TO GRANTING PERMISSION TO MAKE SUCH EXAMINATION. IN THE EVENT OF A REFUSAL ON YOUR PART, THIS OFFICE WILL HAVE NO ALTERNATIVE BUT TO REFER THE MATTER TO THE DEPARTMENT OF JUSTICE FOR OFFICIAL ACTION IN ACCORDANCE WITH THE EXPRESS TERMS OF THE LEASE.