B-140855, OCTOBER 22, 1959, 39 COMP. GEN. 304

B-140855: Oct 22, 1959

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- TO MAKE IMPROVEMENTS AND REPAIRS TO PREMISES WHICH ARE LEASED AT A NOMINAL RENTAL ON A YEAR-TO- YEAR BASIS. SUGGESTION IS MADE FOR THE INCLUSION IN THE LEASE OF A PROVISION FOR REIMBURSEMENT BY AND FOR DETERMINATION OF THE CHANGES AT THE TERMINATION OF THE LEASE. LEASE TERM AND WHETHER THE CHANGES WILL ENHANCE THE VALUE OF THE BUILDING OR BE ADVANTAGEOUS TO THE LESSOR. THE COST OF CAPITAL IMPROVEMENTS WHICH ARE MADE TO PRIVATE PROPERTY LEASED BY THE POST OFFICE DEPARTMENT ON A YEAR-TO-YEAR BASIS FOR A PLANNED PERIOD OF OCCUPANCY OF CONSIDERABLE DURATION SHOULD BE AMORTIZED AS A POSTAL OPERATION EXPENSE OVER THE ENTIRE ESTIMATED PERIOD OF THE LEASE OR THE PERIOD OF USEFULNESS OF THE IMPROVEMENTS.

B-140855, OCTOBER 22, 1959, 39 COMP. GEN. 304

APPROPRIATIONS - POST OFFICE LEASES - IMPROVEMENTS TO PRIVATE PROPERTY - ECONOMY ACT, ETC., LIMITATIONS THE AUTHORITY VESTED IN THE POSTMASTER GENERAL TO ENTER INTO LEASES WITHOUT REGARD TO THE PROVISIONS OF ANY LAW, EXCEPT THOSE SPECIFICALLY APPLICABLE TO THE POST OFFICE DEPARTMENT, 39 U.S.C. 794F, NOT ONLY EXEMPTS THE DEPARTMENT FROM GENERAL STATUTORY LIMITATIONS SUCH AS SECTION 322 OF THE ECONOMY ACT OF 1932, 40 U.S.C. 278 (A), WHICH LIMITS THE COST OF REPAIRS AND IMPROVEMENTS WHICH MAY BE MADE TO LEASED PROPERTY TO 25 PERCENT OF THE AMOUNT OF RENT, BUT ALSO PRECLUDES THE APPLICATION OF THE LONG-STANDING RULE THAT APPROPRIATED FUNDS MAY NOT BE USED FOR THE PERMANENT IMPROVEMENT OF PRIVATE PROPERTY UNLESS SPECIFICALLY AUTHORIZED BY LAW; THEREFORE, THE COST OF PERMANENT IMPROVEMENTS MADE TO PREMISES LEASED FOR POST OFFICE QUARTERS FROM THE GOVERNMENT OF THE VIRGIN ISLANDS FOR A NOMINAL RENT MAY BE PAID FROM THE DEPARTMENT'S FACILITIES APPROPRIATION. IN THE ABSENCE OF A PROVISION IN A POST OFFICE LEASE WHICH WOULD OBLIGATE THE LESSOR--- THE GOVERNMENT OF THE VIRGIN ISLANDS--- TO MAKE IMPROVEMENTS AND REPAIRS TO PREMISES WHICH ARE LEASED AT A NOMINAL RENTAL ON A YEAR-TO- YEAR BASIS, THE COST OF THE IMPROVEMENTS MAY BE PAID BY THE POST OFFICE DEPARTMENT; HOWEVER, SUGGESTION IS MADE FOR THE INCLUSION IN THE LEASE OF A PROVISION FOR REIMBURSEMENT BY AND FOR DETERMINATION OF THE CHANGES AT THE TERMINATION OF THE LEASE, AND FOR DETERMINATION OF THE VALUE OF THE IMPROVEMENTS BASED ON THE RENTAL RATE, LEASE TERM AND WHETHER THE CHANGES WILL ENHANCE THE VALUE OF THE BUILDING OR BE ADVANTAGEOUS TO THE LESSOR. THE COST OF CAPITAL IMPROVEMENTS WHICH ARE MADE TO PRIVATE PROPERTY LEASED BY THE POST OFFICE DEPARTMENT ON A YEAR-TO-YEAR BASIS FOR A PLANNED PERIOD OF OCCUPANCY OF CONSIDERABLE DURATION SHOULD BE AMORTIZED AS A POSTAL OPERATION EXPENSE OVER THE ENTIRE ESTIMATED PERIOD OF THE LEASE OR THE PERIOD OF USEFULNESS OF THE IMPROVEMENTS, WHICHEVER IS THE SHORTER PERIOD.

TO THE POSTMASTER GENERAL, OCTOBER 22, 1959:

REFERENCE IS MADE TO LETTER DATED SEPTEMBER 23, 1959, FROM THE DEPUTY POSTMASTER GENERAL, REQUESTING A DECISION AS TO WHETHER THE DEPARTMENT MAY CONTRACT FOR THE PERFORMANCE OF CERTAIN ALTERATIONS AND IMPROVEMENTS TO LEASED SPACE FOR POST OFFICE QUARTERS IN A PORTION OF THE BUILDING IDENTIFIED AS 76 KRONPRINDSENS GAD, KRONPRINDSENS QUARTER, CHARLOTTE AMALIE, ST. THOMAS, VIRGIN ISLANDS, AND DEFRAY THE COST OF SUCH ALTERATIONS AND IMPROVEMENTS FROM THE DEPARTMENT'S FACILITIES APPROPRIATION.

IT IS STATED THAT THE LEASED SPACE WAS ACQUIRED FOR A RENTAL RATE OF $1 PER ANNUM PURSUANT TO AN ACT OF THE SECOND LEGISLATURE OF THE VIRGIN ISLANDS, ENACTED ON MAY 22, 1958; THAT THE PREMISES ARE OWNED BY THE GOVERNMENT OF THE VIRGIN ISLANDS; THAT THE LEASE, WHICH IS CANCELLABLE BY THE DEPARTMENT AT ANY TIME ON 30 DAYS' WRITTEN NOTICE, WAS EXECUTED ON POD FORM 1417 ON BEHALF OF THE LESSOR BY THE ACTING GOVERNOR OF THE VIRGIN ISLANDS; THAT IT PROVIDES FOR A TERM OF ONE YEAR BEGINNING JULY 1, 1958, WITH AN AUTOMATIC ANNUAL RENEWAL OPTION FROM YEAR TO YEAR IN FAVOR OF THE LESSEE, UNLESS 30 DAYS BEFORE THE END OF ANY ANNUAL TERM THE LESSOR GIVES WRITTEN NOTICE OF TERMINATION AND THE POSTMASTER REPORTS THAT SO FAR AS THE LEGISLATURE AND THE GOVERNMENT OF THE VIRGIN ISLANDS ARE CONCERNED THE DEPARTMENT MAY OCCUPY THE LEASED SPACE FOR AS LONG AS IT SERVES THE DEPARTMENT'S NEEDS. IT IS STATED FURTHER THAT THE DEPARTMENT'S PLANNED OCCUPANCY WILL EXTEND TO A DATE WHICH WILL MAKE THIS ARRANGEMENT MOST ATTRACTIVE FROM AN ECONOMIC VIEWPOINT AND THAT, ACCORDINGLY, IN THIS PARTICULAR INSTANCE IT WOULD ONLY RAISE SUSPICIONS UNNECESSARILY TO GO BACK TO THE LEGISLATURE FOR A LONGER TERM LEASE.

THE PROPOSED ALTERATIONS AND IMPROVEMENTS TO MAKE THE SPACE SUITABLE FOR USE AS A POSTAL STATION WOULD BE EFFECTED PURSUANT TO THE PROVISIONS OF PARAGRAPH 5 OF THE LEASE WHICH PROVIDES THAT THE GOVERNMENT "MAY MAKE ALTERATIONS, ATTACH FIXTURES AND ERECT STRUCTURES OR SIGNS IN OR UPON THE LEASED PREMISES, ALL OF WHICH SHALL BE THE PROPERTY OF THE GOVERNMENT * * *.' THE PROPOSED ALTERATIONS AND IMPROVEMENTS ARE STATED TO INCLUDE TILING THE FLOOR, INSTALLING WAINSCOT IN THE PUBLIC LOBBY, PAINTING INTERIOR AND EXTERIOR, CLEANING FRONT WALL, PROVIDING A FLAG POLE, REPLACING PRESENT WOOD SIDEWALK WITH CONCRETE BLOCKS, INSTALLING A MASONRY PARTITION, REPAIRING PLASTERED WALLS, INSTALLING TOILET FACILITIES AND BRINGING ELECTRIC CURRENT INTO THE BUILDING. IT IS STATED THAT BIDS FOR ACCOMPLISHING THE WORK HAVE BEEN SUBMITTED IN AMOUNTS AGGREGATING $7,266 (SUBSEQUENTLY INFORMALLY REPORTED AS $8,226).

THE APPROPRIATION ENTITLED " FACILITIES" UNDER TITLE II OF THE TREASURY-- - POST OFFICE APPROPRIATION ACT, 1960, 73 STAT. 69, PROVIDES- -

FOR EXPENSES NECESSARY FOR THE OPERATION OF POSTAL FACILITIES, BUILDINGS, AND FIELD COMMUNICATION SERVICE; * * * $190,660.000.

THE REQUEST FOR DECISION STATES, IN EFFECT, THAT IN DETERMINING THE AVAILABILITY OF THIS APPROPRIATION FOR THE PROPOSED WORK THERE NECESSARILY ARE FOR CONSIDERATION THE PROVISIONS OF SECTION 322 OF THE ECONOMY ACT OF JUNE 30, 1932, 47 STAT. 412, AS AMENDED, 40 U.S.C. 278 (A), AND SECTION 8 OF THE POST OFFICE DEPARTMENT FINANCIAL CONTROL ACT OF 1950, 64 STAT. 462, 39 U.S.C. 794F (1), TOGETHER WITH THE LONGSTANDING GENERAL RULE OF THE ACCOUNTING OFFICERS PERTAINING TO IMPROVING PRIVATELY OWNED PROPERTY AT GOVERNMENT EXPENSE. 40 U.S.C. 278 (A) PROVIDES THAT---

* * * NO APPROPRIATION SHALL BE OBLIGATED OR EXPENDED FOR THE RENT OF ANY BUILDING TO BE OCCUPIED FOR GOVERNMENT PURPOSES AT A RENTAL

IN EXCESS OF THE PER ANNUM RATE OF 15 PERCENTUM OF THE FAIR MARKET VALUE OF THE RENTED PREMISES AT DATE OF THE LEASE UNDER WHICH THE PREMISES ARE TO BE OCCUPIED BY THE GOVERNMENT NOR FOR ALTERATIONS, IMPROVEMENTS, AND REPAIRS OF THE RENTED PREMISES IN EXCESS OF 25 PERCENTUM OF THE AMOUNT OF THE RENT FOR THE FIRST YEAR OF THE RENTAL TERM, OR FOR THE RENTAL TERM IF LESS THAN ONE YEAR: * * * THE PROVISIONS OF THIS SECTION AS APPLICABLE TO RENTALS, SHALL APPLY ONLY WHERE THE RENTAL TO BE PAID SHALL EXCEED $2,000 PER ANNUM.

BY 39 U.S.C. 794F, THE POSTMASTER GENERAL IS AUTHORIZED TO "ENTER INTO SUCH LEASES OF REAL PROPERTY AS MAY BE NECESSARY IN THE CONDUCT OF THE AFFAIRS OF THE DEPARTMENT ON SUCH TERMS AS HE MAY DEEM APPROPRIATE, WITHOUT REGARD TO THE PROVISIONS OF ANY LAW, EXCEPT THOSE PROVISIONS OF LAW SPECIFICALLY APPLICABLE TO THE DEPARTMENT.'

THE GENERAL RULE OF THE ACCOUNTING OFFICERS REFERRED TO IS TO THE EFFECT THAT APPROPRIATED FUNDS MAY NOT BE USED FOR THE PERMANENT IMPROVEMENT OF PRIVATE PROPERTY UNLESS SPECIFICALLY AUTHORIZED BY LAW. 5 COMP. DEC. 478; 6 ID. 295; 15 COMP. GEN. 761; 20 ID. 927; 29 ID. 279; 35 ID. 715. THIS IS A RULE OF POLICY AND NOT OF POSITIVE LAW. IT IS BASED UPON THE PRINCIPLE THAT NO GOVERNMENT OFFICIAL, IN THE ABSENCE OF SPECIFIC STATUTORY PROVISION, IS AUTHORIZED TO GIVE AWAY PROPERTY OF THE GOVERNMENT.

IT HAS BEEN HELD THAT THE 25 PERCENTUM LIMITATION OF SECTION 322 OF THE ECONOMY ACT OF JUNE 30, 1932, AS AMENDED, IS APPLICABLE REGARDLESS OF THE AMOUNT OF THE RENT AND THAT IN SITUATIONS INVOLVING LEASES FOR NOMINAL RENTS OR ON A RENT-FREE BASES THE COST OF REPAIRS, ALTERATIONS, OR IMPROVEMENTS MADE AT THE EXPENSE OF THE GOVERNMENT WILL BE REGARDED AS TANTAMOUNT TO OR IN LIEU OF RENT AND, THEREFORE, SUBJECT TO THE 15 PERCENTUM LIMITATION OF THE ACT IN SITUATIONS WHERE THE AMOUNT PROPOSED TO BE EXPENDED FOR SUCH ALTERATIONS, IMPROVEMENTS AND REPAIRS, PLUS THE NOMINAL RENT EXCEEDS $2,000. 21 COMP. GEN. 906; 35 ID. 713; B-57501, MAY 20, 1946. ALSO, AS INDICATED IN THE REQUEST FOR DECISION, IT HAS BEEN HELD THAT EXPENDITURES IN EXCESS OF THE 25 PERCENTUM LIMITATION MAY BE MADE WHERE THE AGENCY OCCUPYING THE LEASED PREMISES IS EXEMPTED FROM THE STATUTORY LIMITATION. IN THE CIRCUMSTANCES, SINCE SECTION 322 IN A GENERAL STATUTE AND NOT SPECIFICALLY APPLICABLE TO THE POST OFFICE DEPARTMENT, WE CONCUR IN THE DEPARTMENT'S CONCLUSION THAT IT PROPERLY MAY EFFECT ALTERATIONS, IMPROVEMENTS, AND REPAIRS TO LEASED PREMISES WITHOUT REGARD TO THE 25 PERCENTUM LIMITATION IN SITUATIONS WHERE THE LESSOR IS NOT OBLIGATED TO DO SO AND SUCH ALTERATIONS, IMPROVEMENTS, AND REPAIRS ARE NECESSARY FOR THE OPERATION OF THE INVOLVED ACTIVITY.

IN VIEW OF THE INAPPLICABILITY OF THE 25 PERCENTUM LIMITATION TO LEASES FOR POST OFFICE PURPOSES AND THE PURPOSE SOUGHT TO BE ACCOMPLISHED BY THE CONGRESS IN EXEMPTING THE DEPARTMENT IN ITS LEASING OPERATIONS FROM ANY PROVISION OF LAW EXCEPT THOSE STATUTORY PROVISIONS SPECIFICALLY APPLICABLE TO THE DEPARTMENT, IT WOULD BE INCONGRUOUS AND INCONSISTENT TO HOLD THAT THE RULE AGAINST PERMANENT IMPROVEMENTS TO PRIVATELY OWNED PROPERTY IS APPLICABLE TO THE DEPARTMENT'S LEASES NOTWITHSTANDING THE INAPPLICABILITY OF THE 25 PERCENTUM LIMITATION. THEREFORE, WE ALSO CONCUR WITH THE DEPARTMENT'S CONCLUSION THAT IT MAY MAKE IMPROVEMENTS TO PREMISES LEASED FOR POST OFFICE PURPOSES WITHOUT REGARD TO THE RULE AGAINST PERMANENT IMPROVEMENT OF PRIVATE PROPERTY WHERE THE LESSOR IS NOT OBLIGATED TO MAKE SUCH IMPROVEMENTS SUBJECT, HOWEVER, TO CONDITIONS HEREAFTER SET FORTH.

WHILE THE INVOLVED LEASE OBLIGATES THE LESSOR TO MAINTAIN THE PREMISES IN GOOD TENANTABLE CONDITION, UNLESS OTHERWISE SPECIFIED THEREIN, CONSIDERING THE TYPE OF THE PROPOSED IMPROVEMENTS TOGETHER WITH THE RENTAL CONSIDERATION AS SET FORTH IN THE LETTER OF SEPTEMBER 23, 1959, WE ARE OF THE VIEW THAT SUCH IMPROVEMENTS MAY NOT PROPERLY BE CONSIDERED AS AN OBLIGATION OF THE LESSOR UNDER THIS PROVISION OF THE LEASE. AMERICAN TRUST CO. V. TRUCK INSURANCE EXCHANGE, 305 P.2D 73, 74; HOLMAN V. COUNTY OF SANTA CRUZ, 205 P.2D 767; STANLEY V. CITY OF MACON, 97 S.E. 2D 330, 332; THOMPSON V. BRACKEN COUNTY, 294 S.W. 2D 943, 946; 54 C.J.S. 898. ACCORDINGLY, AND SINCE THERE IS NO OTHER PROVISION IN THE LEASE WHICH MAY BE CONSTRUED AS OBLIGATING THE LESSOR FOR THE INVOLVED IMPROVEMENTS--- SUCH IMPROVEMENTS GENERALLY OPERATING ONLY TO MITIGATE OR RELIEVE THE GOVERNMENT OF DAMAGES WHERE THE GOVERNMENT FAILS TO RESTORE--- THE COST OF SUCH IMPROVEMENTS IF ACCOMPLISHED AS PROPOSED MUST BE ASSUMED BY THE GOVERNMENT. 32 AM. JUR. SECS 659, 843; 25 ALR 2D 885. REALTY ASSOCIATES V. UNITED STATES, 134 C.1CLS. 167; 39 OP. ATTY. GEN. 338. IN THE CIRCUMSTANCES, IN SITUATIONS SUCH AS THE PRESENT CASE WHERE EXTENSIVE REPAIRS, ALTERATIONS, AND IMPROVEMENTS ARE REQUIRED TO BE MADE AT GOVERNMENT EXPENSE, THERE IS SUGGESTED FOR YOUR CONSIDERATION THE ADVISABILITY OF INCORPORATING IN SUCH LEASES A PROVISION FOR REIMBURSEMENT BY THE LESSOR OF THE RESIDUAL VALUE OF SUCH CHANGES AT THE TERMINATION OF THE LEASE TOGETHER WITH THE BASIS FOR DETERMINING SUCH VALUE. THIS WOULD APPEAR TO BE PARTICULARLY DESIRABLE IN A SITUATION SUCH AS HERE INVOLVED WHERE THE TENURE IS ON A YEAR-TO-YEAR BASIS AND SUBJECT TO TERMINATION BY THE LESSOR AT THE END OF ANY ANNUAL TERM SUBJECT TO TIMELY PRIOR NOTICE. IN DETERMINING THE RESIDUAL VALUE THERE NECESSARILY WOULD BE FOR CONSIDERATION SUCH FACTORS AS (1) THE RENTAL RATE, (2) THE LEASE TERM, AND (3) THE TYPE OF THE ALTERATION, IMPROVEMENT, OR REPAIR WITH PARTICULAR CONSIDERATION AS TO WHETHER OR NOT SUCH BUILDING CHANGES AT THE TERMINATION OF THE LEASE WILL OPERATE TO ENHANCE THE VALUE OF THE BUILDING OR BE ADVANTAGEOUS TO THE LESSOR.

ALSO, WE BELIEVE THAT IN THIS TYPE OF CASE THE DEPARTMENT SHOULD ESTABLISH CRITERIA FOR CAPITALIZATION OF THE COSTS OF SUCH IMPROVEMENTS WHICH ARE OF A CAPITAL NATURE, AND PROVIDE FOR THE AMORTIZATION OF SUCH COSTS AS A POSTAL OPERATION EXPENSE. IT IS OUR VIEW THAT THE AMORTIZATION PERIOD SHOULD ORDINARILY BE OVER THE ENTIRE TERM OF THE LEASE OR THE PERIOD OF USEFULNESS OF THE IMPROVEMENTS, WHICHEVER IS THE SHORTER PERIOD. IN THE PRESENT INSTANCE, SINCE IT IS INDICATED THAT THE PLANNED OCCUPANCY WILL EXTEND FOR A SUFFICIENT PERIOD TO MAKE THE ARRANGEMENT ATTRACTIVE FROM AN ECONOMIC VIEWPOINT, THE COST OF THE IMPROVEMENTS SHOULD BE AMORTIZED OVER THE ESTIMATED TERM OF SUCH PLANNED OCCUPANCY OR THE PERIOD OF USEFULNESS, WHICHEVER IS LESS.