Long-term Leasing of Buildings and Land by Government Contractors

The General Accounting Office has examined the long-term leasing of buildings and land by Government contractors. Our review of the long-term leasing of buildings and land by one contractor, the Lockheed Missiles and Space Company, has disclosed that Lockheed's use of this method of acquiring facilities is more costly to the Government than would be the case if the contractor had constructed and retained ownership of the property for use on Government work. However, we believe that current provisions of the Armed Services Procurement Regulation provide an incentive for contractors to rent. It is out belief that the pertinent Armed Services Procurement Regulation guidelines should be reconsidered by the Department of Defense.

Our review of this matter disclosed that the Lockheed Aircraft Corporation, in behalf of its Missiles and Space Division, entered into noncancelable leases on property which cost about $27 million, for a 25-year period, which committed it to pay total rentals of about $46 million for the period. Although the cost of the land and interest expense on the contractor's investment in buildings and land would not have been reimbursable under the Government cost-reimbursement contracts in effect, the contractor, through the long-term leasing arrangements, is being reimbursed for all costs of the property. If the use of the facilities continues almost exclusively for negotiated Government work over the initial 25-year period of the leases, the Government will pay, through reimbursement of rental payments, about $19 million more then the cost of the buildings, which would be the amount chargeable to Government contracts as depreciation if the contractor owned the property. Under these conditions, however, the contractor will save during this same period a substantial amount, which we estimate at about $10 million, in interest expense which it would have incurred to finance ownership of the facilities. Also the higher leasing costs are included in the cost base in establishing fees or profits on Government contracts. Furthermore, under the current Armed Services Procurement Regulation guidelines for establishing the source of resources portion of the contract profit allowances, a contractor is allowed the same profit or fee consideration for furnishing the facilities whether they are owned, and the contractor absorbs the financing costs, or whether that are rented, and the contractor passes the rental costs, which would include the owner's financing costs, on to the Government. Lockheed entered into the leases without seeking Government approval of these transactions and without disclosing details of the lease arrangements until after they had been consummated. Although there was no legal requirement for the contractor to obtain Government approval of its plans, the contractor's work at the time consisted almost entirely of negotiated Government cost-reimbursement-type contracts, and other cost-type contracts were in process of negotiation or definitization. Had the Government been informed of the cost consequences, it would have been in a position to compare the lease arrangement with Government provision and ownership of the facilities.