B-128270, JUNE 26, 1956, 35 COMP. GEN. 713

B-128270: Jun 26, 1956

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15 PERCENT OF THE FAIR MARKET VALUE OF THE PREMISES ON THE DATE OF THE LEASE AND IF THE PREMISES ARE OCCUPIED ON A NOMINAL RENTAL BASIS THE TOTAL COST OF ALTERATIONS. YOU STATE THAT THE ABOVE PROPERTY IS IDEAL FOR COAST GUARD PURPOSES. PROVIDED SOME NECESSARY REPAIRS ARE MADE. IT IS STATED THAT THE FAIR MARKET VALUE OF THE PROPERTY HAS BEEN LOCALLY ASSESSED AT $108. FURTHER IT IS STATED THAT IN ORDER TO ADAPT THIS PROPERTY FOR COAST GUARD PURPOSES IT IS ESTIMATED THAT AN INITIAL EXPENDITURE OF $13. REPAIRS IN SUCH A CASE IS TO BE REGARDED AS RENT. IMPROVEMENTS AND REPAIRS WILL BE REQUIRED FROM TIME TO TIME DURING THE PERIOD OF THE LEASE AND THE COSTS WILL BE PAYABLE FROM COAST GUARD APPROPRIATED FUNDS.

B-128270, JUNE 26, 1956, 35 COMP. GEN. 713

LEASES - REPAIRS AND IMPROVEMENTS - LIMITATIONS - RENT-FREE OR NOMINAL RENTAL THE TOTAL COST OF ALTERATIONS, REPAIRS AND IMPROVEMENTS TO PRIVATE PROPERTY LEASED BY THE GOVERNMENT ON A RENT-FREE BASIS MAY NOT EXCEED, IN ANY 1 YEAR, 15 PERCENT OF THE FAIR MARKET VALUE OF THE PREMISES ON THE DATE OF THE LEASE AND IF THE PREMISES ARE OCCUPIED ON A NOMINAL RENTAL BASIS THE TOTAL COST OF ALTERATIONS, PLUS THE NOMINAL RENT, MAY NOT EXCEED THE 15 PERCENT LIMITATION. THE WORD "NOMINAL" AS APPLIED TO RENT DEPENDS ON THE FACTS IN EACH CASE, BUT GENERALLY IT DENOTES A CONSIDERATION WHOLLY UNRELATED TO THE ACTUAL OR FAIR MARKET VALUE OF THE LEASED PREMISES, SUCH AS $1 PER ANNUM, OR $1 PER ANNUM TOGETHER WITH THE OBLIGATION TO REPAIR AND MAINTAIN THE PREMISES OR TO PAY TAXES ASSESSED AGAINST THE PROPERTY.

TO THE SECRETARY OF THE TREASURY, JUNE 26, 1956:

YOUR LETTER OF JUNE 12, 1956, PRESENTS FOR DECISION TWO QUESTIONS, PERTAINING TO THE APPLICABILITY OF OUR DECISION REPORTED IN 21 COMP. GEN. 906, TO A PROPOSED YEARLY RENEWABLE LEASE OF THE MINNESOTA NAVAL MILITIA PIER, WITH IMPROVEMENTS THEREON, AT DULUTH, MINNESOTA, WHICH YOU STATE HAS BEEN OFFERED THE COAST GUARD ON A RENT-FREE BASIS FOR A PERIOD OF 20 YEARS, WITH RENEWAL OPTION FOR AN ADDITIONAL 20 YEARS. THE CITED DECISION CONCERNS THE AMOUNTS WHICH MAY BE EXPENDED FOR ALTERATIONS, IMPROVEMENTS AND REPAIRS UNDER RENT-FREE AND NOMINAL-RENT LEASES.

YOU STATE THAT THE ABOVE PROPERTY IS IDEAL FOR COAST GUARD PURPOSES, INCLUDING THE BERTHING OF ITS VESSELS, PROVIDED SOME NECESSARY REPAIRS ARE MADE, AND THAT ACCEPTANCE OF THE OFFER WOULD PERMIT TERMINATION OF A COMMERCIAL LEASE FOR WHARF SPACE AS WELL AS THE CANCELLATION OF A PROPOSED COAST GUARD MAJOR CONSTRUCTION PROJECT AT DULUTH. IT IS STATED THAT THE FAIR MARKET VALUE OF THE PROPERTY HAS BEEN LOCALLY ASSESSED AT $108,000, WHICH VALUATION, IF REPRESENTATIVE OF THE FAIR MARKET VALUE, UNDER THE 15 PERCENTUM LIMITATION OF THE ECONOMY ACT OF JUNE 30, 1932, 47 STAT. 412, AS AMENDED, 40 U.S.C. 478 (A), WOULD JUSTIFY AN ANNUAL RENT NOT TO EXCEED $16,200. FURTHER IT IS STATED THAT IN ORDER TO ADAPT THIS PROPERTY FOR COAST GUARD PURPOSES IT IS ESTIMATED THAT AN INITIAL EXPENDITURE OF $13,000 WOULD BE REQUIRED FOR ALTERATIONS, IMPROVEMENTS AND REPAIRS. YOUR LETTER QUOTES FROM THE ABOVE-CITED DECISION AS FOLLOWS:

* * * SINCE THE COST OF ALTERATIONS, IMPROVEMENTS, AND REPAIRS IN SUCH A CASE IS TO BE REGARDED AS RENT, THE TOTAL AMOUNT THEREOF PLUS ANY NOMINAL RENT MUST NOT EXCEED 15 PERCENTUM OF THE FAIR MARKET VALUE OF THE PREMISES UNLESS SUCH TOTAL COST PLUS THE NOMINAL RENT DOES NOT EXCEED $2,000.

AS CONCERNS THE LEASE HERE PROPOSED, YOU STATE THAT IN ORDER FOR THE COAST GUARD TO ACCEPT THE STATE'S OFFER AND ANTICIPATE EFFECTIVE AND FULL UTILIZATION OF THE PROPERTY, ALTERATIONS, IMPROVEMENTS AND REPAIRS WILL BE REQUIRED FROM TIME TO TIME DURING THE PERIOD OF THE LEASE AND THE COSTS WILL BE PAYABLE FROM COAST GUARD APPROPRIATED FUNDS. ACCORDINGLY, YOU SUBMIT FOR OUR CONSIDERATION TWO QUESTIONS, AS FOLLOWS:

(1) WHEN PRIVATE PROPERTY IS OCCUPIED RENT-FREE, OR AT A NOMINAL RENTAL, MAY EXPENDITURES AS NECESSARY FOR ALTERATIONS, IMPROVEMENTS, AND REPAIRS OF THE RENTED PREMISES BE MADE EACH YEAR OF THE RENTAL TERM, PROVIDED THAT FOR NO YEAR DO THE EXPENDITURES, PLUS THE NOMINAL RENTAL EXCEED 15 PERCENTUM OF THE FAIR MARKET VALUE OF THE PREMISES?

(2) ALTHOUGH IN THIS CASE THE PREMISES ARE TO BE OCCUPIED RENT FREE, A DECISION IS REQUESTED AS TO WHAT AMOUNT CONSTITUTES NOMINAL RENTAL WITHIN THE MEANING OF YOUR DECISION IN 21 COMP. GEN. 906.

WHERE PREMISES ARE OCCUPIED BY A GOVERNMENT AGENCY AT A NOMINAL RENT OR ON A RENT-FREE BASIS, SUCH AS PROPOSED IN YOUR LETTER, ANY REPAIRS OR ALTERATIONS NECESSARY FOR THE CONTINUED OCCUPANCY MAY BE CONSIDERED AS A COST OF OCCUPANCY, THAT IS, AS IN LIEU OF RENT, FOR EACH YEAR OF THE RENTAL TERM. HOWEVER, AS STATED IN 21 COMP. GEN. 906, THE TOTAL COST OF SUCH ALTERATIONS, IMPROVEMENTS AND REPAIRS, PLUS THE NOMINAL RENTAL, DURING ANY YEAR OF THE RENTAL TERM NOT EXCEED 15 PERCENTUM OF THE FAIR MARKET VALUE AT DATE OF THE LEASE, UNLESS THE TOTAL COST PLUS THE NOMINAL RENT DOES NOT EXCEED $2,000 PER ANNUM. ACCORDINGLY, YOUR FIRST QUESTION IS ANSWERED IN THE AFFIRMATIVE.

AS TO YOUR SECOND QUESTION, THE WORD "NOMINAL," AS APPLIED TO RENTALS WITHIN THE MEANING OF THE RULE ANNOUNCED IN 21 COMP. GEN. 906, GENERALLY HAS BEEN USED TO DENOTE A CONSIDERATION WHOLLY UNRELATED TO THE ACTUAL OR FAIR MARKET VALUE OF THE LEASED PREMISES, SUCH AS $1 PER ANNUM, OR $1 PER ANNUM TOGETHER WITH THE OBLIGATION TO REPAIR AND MAINTAIN THE PREMISES OR TO PAY TAXES ASSESSED AGAINST THE PROPERTY AS PART OF THE RENTAL CONSIDERATION. NO GENERAL RULE MAY BE STATED AS TO WHAT CONSTITUTES A NOMINAL RENTAL IN ALL CASES AS IT NECESSARILY DEPENDS ON THE FACTS IN EACH PARTICULAR CASE.