B-165261, MAY 8, 1969, 48 COMP. GEN. 722

B-165261: May 8, 1969

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WAS NOT IN ACCORD WITH THE PROCUREMENT PROCEDURE ENVISIONED BY THE REGULATIONS. FOR THE LESSOR SHOULD HAVE BEEN INFORMED THE RENT PROPOSED DUE TO THE AIR CONDITIONING IMPROVEMENT WOULD EXCEED THE STATUTORY LIMITATION AND GIVEN AN OPPORTUNITY TO NEGOTIATE THE RENTAL DOWNWARD. THE AWARD WILL NOT BE DISTURBED. 1969: REFERENCE IS MADE TO LETTER OF NOVEMBER 22. THE FIRST TWO FLOORS OF THE ANNEX ARE THE ONLY AIR-CONDITIONED FLOORS. VA REQUESTED GSA TO HAVE THE BALANCE OF THE SPACE OCCUPIED BY VA AIR CONDITIONED. NO AGREEMENT WAS REACHED BECAUSE THE LESSOR REQUIRED A 5-YEAR LEASE EXTENSION AT AN INCREASED ANNUAL RENTAL AND BECAUSE GSA BELIEVED THAT VA COULD BE QUARTERED IN A NEW FEDERAL OFFICE BUILDING WHICH WOULD BE CONSTRUCTED IN DETROIT IN LESS THAN 5 YEARS.

B-165261, MAY 8, 1969, 48 COMP. GEN. 722

LEASES--RENT--LIMITATION--FAIR MARKET VALUE DETERMINATION--PROPRIETY OF PROCUREMENT PROCEDURE THE FAILURE TO FURNISH AN INCUMBENT LESSOR WITH A REQUEST FOR PROPOSALS AND TO PROVIDE THE OPPORTUNITY TO COMPETE AS REQUIRED BY SECTION 1-3.101 (C) AND (D) OF THE FEDERAL PROCUREMENT REGULATIONS BECAUSE BASED ON OTHER THAN A THEN CURRENT PROPERTY APPRAISAL A PREVIOUSLY PROPOSED RENTAL INCREASE TO COVER COMPLETING THE AIR CONDITIONING OF THE BUILDING OCCUPIED BY THE VETERANS ADMINISTRATION WOULD CAUSE THE RENTAL TO EXCEED THE 15 PERCENT OF THE FAIR MARKET VALUE AT THE DATE OF THE LEASE LIMITATION IMPOSED BY SECTION 322 OF THE ECONOMY ACT, 40 U.S.C. 278A, WAS NOT IN ACCORD WITH THE PROCUREMENT PROCEDURE ENVISIONED BY THE REGULATIONS, FOR THE LESSOR SHOULD HAVE BEEN INFORMED THE RENT PROPOSED DUE TO THE AIR CONDITIONING IMPROVEMENT WOULD EXCEED THE STATUTORY LIMITATION AND GIVEN AN OPPORTUNITY TO NEGOTIATE THE RENTAL DOWNWARD. THE SUCCESSFUL LESSOR HAVING INCURRED SUBSTANTIAL EXPENSES, THE AWARD WILL NOT BE DISTURBED, BUT A RECURRENCE OF A SIMILAR SITUATION SHOULD BE PRECLUDED.

TO THE ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION, MAY 8, 1969:

REFERENCE IS MADE TO LETTER OF NOVEMBER 22, 1968, AND SUBSEQUENT CORRESPONDENCE FROM YOUR GENERAL COUNSEL, REPORTING ON THE PROTEST OF CROWLEY, MILNER AND COMPANY AGAINST THE AWARD OF A LEASE TO MR. RAYMOND J. BIGGS FOR OFFICE SPACE IN DETROIT, MICHIGAN, FOR THE USE OF THE VETERANS ADMINISTRATION (VA).

CROWLEY, MILNER AND COMPANY (LESSOR) HAS BEEN PROVIDING OFFICE SPACE FOR VA IN THE EAST BUILDING AND ANNEX OF THE CROWLEY-MILNER BUILDING IN DETROIT, MICHIGAN, SINCE JUNE 1960 UNDER GENERAL SERVICES ADMINISTRATION (GSA) LEASE GS-05B-7984 AND SUPPLEMENTS THERETO. THE FIRST TWO FLOORS OF THE ANNEX ARE THE ONLY AIR-CONDITIONED FLOORS. IN MARCH 1963, VA REQUESTED GSA TO HAVE THE BALANCE OF THE SPACE OCCUPIED BY VA AIR CONDITIONED. GSA SOLICITED A PROPOSAL FROM THE LESSOR TO PROVIDE THE ADDITIONAL AIR CONDITIONING. NO AGREEMENT WAS REACHED BECAUSE THE LESSOR REQUIRED A 5-YEAR LEASE EXTENSION AT AN INCREASED ANNUAL RENTAL AND BECAUSE GSA BELIEVED THAT VA COULD BE QUARTERED IN A NEW FEDERAL OFFICE BUILDING WHICH WOULD BE CONSTRUCTED IN DETROIT IN LESS THAN 5 YEARS. THE PLANNED CONSTRUCTION DID NOT MATERIALIZE AND ON MAY 9, 1967, GSA RESOLICITED A PROPOSAL FROM CROWLEY, MILNER FOR AIR CONDITIONING THE LEASED PREMISES BY LETTER OF OCTOBER 6, 1967, MR. ROBERT T. MARQUART OF CROWLEY, MILNER ADVISED THAT, BASED UPON INFORMATION OBTAINED FROM CONTRACTORS AND AN ENGINEERING CONSULTANT, HE ESTIMATED THAT THE LESSOR COULD FURNISH AIR CONDITIONING "AT AN ADDITIONAL ANNUAL RENTAL IN THE AREA OF $1.12 SQ. FT; BASED ON A FIRM LEASE RENEWAL FROM APRIL 1, 1968 FOR 5 YEARS WITH OPTION PRIVILEGES BY YEAR THROUGH DECEMBER 31, 1974."

ON JANUARY 10, 1966, AN INDEPENDENT APPRAISER FIXED THE FAIR MARKET VALUE OF THE LEASED PREMISES AT $886,000. IT WAS THE OPINION OF THE GSA REGIONAL DIRECTOR THAT ON THE BASIS OF THIS APPRAISAL THE LESSOR'S PROPOSAL OF OCTOBER 6 WOULD CAUSE THE RENTAL TO EXCEED THE LIMITATION IN SECTION 322 OF THE ECONOMY ACT, 40 U.S.C. 278A. THE ACT PROVIDES THAT NO APPROPRIATION SHALL BE OBLIGATED OR EXPENDED FOR THE RENT OF ANY BUILDING OR PART OF BUILDING TO BE OCCUPIED FOR GOVERNMENT PURPOSES AT A RENTAL IN EXCESS OF THE PER ANNUM RATE OF 15 PERCENT OF THE FAIR MARKET VALUE OF THE RENTED PREMISES AT THE DATE OF THE LEASE UNDER WHICH THE PREMISES ARE TO BE OCCUPIED BY THE GOVERNMENT.

ACCORDING TO A MEMORANDUM PREPARED BY THE GSA REGIONAL DIRECTOR ON SEPTEMBER 20, 1968, THERE WERE TELEPHONE CONVERSATIONS WITH MR. MARQUART AFTER THE RECEIPT OF THE OCTOBER 6, 1967, LETTER. MR. MARQUART IS STATED TO HAVE COMMENTED THAT IF ANY REDUCTION FROM THE$1.12 OFFER COULD BE CONSIDERED, IT WOULD REPRESENT ONLY A FEW PENNIES AND UNDER NO CIRCUMSTANCES COULD IT POSSIBLY EXCEED A REDUCTION OF $0.05 PER SQUARE FOOT PER ANNUM. SUCH A REDUCTION WOULD NOT HAVE QUALIFIED THE RENTAL CONSIDERATION UNDER THE ECONOMY ACT BASED UPON THE $886,000 FAIR MARKET VALUE OF THE PROPERTY. IN AN AFFIDAVIT OF NOVEMBER 8, 1968, MR. MARQUART DENIES THAT CROWLEY, MILNER WAS ASKED IF IT COULD REDUCE THE ESTIMATE FOR AIR CONDITIONING. A REPRESENTATIVE OF OUR OFFICE HAS EXAMINED THE GSA REGIONAL FILES BUT HE DID NOT FIND ANY RECORD OF TELEPHONE CONVERSATIONS WITH CROWLEY, MILNER CONCERNING ATTEMPTS TO OBTAIN A REDUCTION OF THE $1.12 PER SQUARE FOOT PRICE. HOWEVER, THE ABSENCE OF SUCH RECORDS DOES NOT NECESSARILY MEAN THAT SUCH CONVERSATIONS DID NOT OCCUR SINCE THEY MAY HAVE BEEN A FAILURE TO DOCUMENT THE TELEPHONE CALLS. IF THERE WAS AN OFFER MADE BY THE LESSOR TO REDUCE THE $1.12 PRICE PER SQUARE FOOT BY $0.05, WE NOTE THAT, NEVERTHELESS, IN DETERMINING WHETHER THE ECONOMY ACT LIMITATION WOULD BE EXCEEDED, $1.12 PER SQUARE FOOT IS TREATED AS THE OFFERED PRICE.

IT IS STATED IN THE NOVEMBER 22, 1968, REPORT THAT THE INDEPENDENT APPRAISER WHO APPRAISED THE PROPERTY FOR THE GOVERNMENT ON JANUARY 10, 1966, ORALLY CONFIRMED THE APPRAISAL FOR THE PROPERTY EVEN THOUGH AIR CONDITIONING MIGHT BE ADDED TO THE PROPERTY. HOWEVER, THE GSA FILES EXAMINED BY OUR REPRESENTATIVE DO NOT CONTAIN ANY NOTATION OF SUCH A VERBAL AFFIRMATION. IN A WRITTEN STATEMENT BY THE APPRAISER DATED DECEMBER 19, 1968, HE DENIES THAT HE EVER MADE SUCH A REPRESENTATION. OUR REPRESENTATIVE CONTACTED THE APPRAISER BY TELEPHONE AND HE FURTHER DENIED EVER MAKING SUCH A REPRESENTATION.

A MARKET SURVEY WAS CONDUCTED BY GSA TO SEE IF SUITABLE AIR CONDITIONED SPACE COULD BE LOCATED FOR VA. AS A RESULT OF THE SURVEY, A REQUEST FOR PROPOSALS WAS ISSUED TO MR. RAYMOND J. BIGGS WHO SUBMITTED AN OFFER TO LEASE SPACE WHICH WAS ACCEPTED BY GSA ON MAY 29, 1968.

THE AWARD WAS PROTESTED TO OUR OFFICE BY LETTER OF SEPTEMBER 11,1968, FROM THE ATTORNEY FOR CROWLEY, MILNER. THE ATTORNEY PROTESTED ON THE BASIS THAT GSA DID NOT NEGOTIATE WITH THE COMPANY AND THAT IT HAD A LEGAL OBLIGATION TO NEGOTIATE WITH THE COMPANY BEFORE NEGOTIATING A NEW LEASE WITH SOME OTHER OFFEROR FOR A DIFFERENT LOCATION. THE ATTORNEY CONTENDED THAT GSA WAS REQUIRED TO NEGOTIATE WITH THE LESSOR ALONE IN VIEW OF 41 CFR 101-18.102 (A) WHICH STATES:

GSA WILL LEASE SPACE IN PRIVATELY OWNED BUILDINGS AND LAND ONLY WHEN NEEDS CANNOT BE SATISFACTORILY MET IN GOVERNMENT-OWNED OR PRESENTLY LEASED SPACE * * *.

YOUR GENERAL COUNSEL HAS TAKEN THE POSITION IN THE NOVEMBER 22 REPORT THAT THE QUOTED PROVISION APPLIES WHEN GSA HAS SPACE AVAILABLE IN A GOVERNMENT-OWNED BUILDING OR IN SPACE LEASED BY THE GOVERNMENT FOR WHICH THE GOVERNMENT ALREADY IS UNDER CONTRACT TO PAY RENT, IN ORDER TO PREVENT THE MAKING OF NEW LEASES WHEN SPACE IS AVAILABLE, AND THAT THE GOVERNMENT IS NOT REQUIRED TO NEGOTIATE WITH A LESSOR WHOSE LEASE IS EXPIRING. FURTHER ADVISED THAT GSA USUALLY NEGOTIATES WITH SUCH A LESSOR IN ORDER TO OBTAIN THE MAXIMUM FEASIBLE COMPETITION, UNLESS IT IS UNABLE TO USE THE SPACE.

TO CONCLUDE THAT THE QUOTED REGULATION GIVES THE INCUMBENT LESSOR A RIGHT TO NEGOTIATE A LEASE EXTENSION TO THE EXCLUSION OF OTHER POSSIBLE LESSORS WOULD VIRTUALLY PROVIDE THE LESSOR WITH A MONOPOLY AND PRECLUDE THE GOVERNMENT FROM NEGOTIATING WITH OTHER POTENTIAL LESSORS WHO MIGHT BE ABLE TO MEET OR EXCEED THE GOVERNMENT'S REQUIREMENTS, ALL PERTINENT FACTORS CONSIDERED. IN THAT CONNECTION, SECTION 1-3.101 (C) OF THE FEDERAL PROCUREMENT REGULATIONS (FPR) PROVIDES THAT WHENEVER PROPERTY OR SERVICES ARE TO BE PROCURED BY NEGOTIATION, PROPOSALS SHALL BE SOLICITED FROM THE MAXIMUM NUMBER OF QUALIFIED SOURCES, AND FPR SEC. 1-3.101 (D) PROVIDES THAT NEGOTIATED PROCUREMENT SHALL BE ON A COMPETITIVE BASIS TO THE MAXIMUM PRACTICAL EXTENT. ACCORDINGLY, WE AGREE THAT THE QUOTED REGULATION SHOULD NOT BE CONSTRUED AS GIVING THE INCUMBENT LESSOR AN EXCLUSIVE RIGHT TO NEGOTIATE A LEASE EXTENSION. HOWEVER, CONTRARY TO THE GENERAL COUNSEL'S STATEMENT THAT NO REQUIREMENT EXISTS WHICH WOULD IMPOSE ON THE GOVERNMENT A DUTY TO NEGOTIATE WITH A LESSOR WHOSE LEASE IS EXPIRING, WE BELIEVE THAT, UNDER FPR SEC. 1-3.101 (C) AND (D), AN INCUMBENT LESSOR IS REQUIRED TO BE GIVEN AN EQUAL OPPORTUNITY TO COMPETE TO PROVIDE SPACE MEETING THE GOVERNMENT'S NEEDS.

CROWLEY, MILNER WAS NOT PROVIDED AN OPPORTUNITY TO SUBMIT AN OFFER IN RESPONSE TO THE REQUEST FOR PROPOSALS UNDER WHICH A LEASE HAS BEEN AWARDED TO ANOTHER LESSOR. APPARENTLY, THE PREVIOUS LESSOR WAS NOT FURNISHED A COPY OF THE REQUEST FOR PROPOSALS BECAUSE OF THE PREVIOUS FINDING THAT ITS TENDERED RENTAL COULD NOT COME WITHIN THE ECONOMY ACT LIMITATION. HOWEVER, REGARDLESS OF THE PREVIOUS INFORMATION FURNISHED IN THE OCTOBER 6, 1967, LETTER AND BY THE JANUARY 1966 APPRAISAL OF THE PROPERTY, CROWLEY, MILNER SHOULD HAVE BEEN FURNISHED A COPY OF THE REQUEST FOR PROPOSALS IN KEEPING WITH THE FPR REQUIREMENT FOR MAXIMUM COMPETITION. WHILE, FROM THE PREVIOUS APPRAISAL, IT MIGHT NOT HAVE APPEARED THAT CROWLEY, MILNER COULD HAVE QUALIFIED UNDER THE ECONOMY ACT, IT IS NOTED THAT PARAGRAPH 2 OF SCHEDULE "D" OF THE REQUEST PROVIDED THAT OFFERORS SHALL MAKE AVAILABLE TO THE GOVERNMENT ANY PERTINENT INFORMATION WHICH WOULD ASSIST IN A DETERMINATION OF FAIR MARKET VALUE FOR PURPOSES OF APPLYING THE ECONOMY ACT LIMITATION. CROWLEY, MILNER WAS DEPRIVED OF THIS OPPORTUNITY BECAUSE IT WAS NOT SOLICITED UNDER THE REQUEST FOR PROPOSALS. THIS IS SIGNIFICANT SINCE APPARENTLY THE CROWLEY-MILNER PREMISES WOULD HAVE BEEN ACCEPTABLE TO THE GOVERNMENT IF THEY COULD HAVE BEEN UPGRADED TO MEET THE REQUIREMENTS IN THE REQUEST FOR PROPOSALS AND ALSO THE ECONOMY ACT LIMITATION.

WE FURTHER QUESTION WHETHER THERE WAS EFFECTIVE NEGOTIATION WITH CROWLEY, MILNER BEFORE THE ISSUANCE OF THE REQUEST FOR PROPOSALS. AS INDICATED ABOVE, THERE IS SOME DISPUTE AS TO WHETHER CROWLEY, MILNER WAS EVER CONTACTED TO REDUCE ITS $1.12 OFFER. EVEN IF WE ASSUME THAT THE ADMINISTRATIVE VERSION OF THE FACTS IS CORRECT, AS WE DO AS A GENERAL RULE (B-163131, JULY 15, 1968), THAT CROWLEY, MILNER WAS REQUESTED TO REDUCE ITS $1.12 PRICE AND THAT IT ADVISED THAT IT COULD REDUCE ITS OFFER ONLY BY ABOUT $0.05, SUCH EXCHANGE OF INFORMATION DID NOT REPRESENT MEANINGFUL BARGAINING WHICH NEGOTIATION CONTEMPLATES. WE NOTE THAT GSA ESTIMATED THE COST FOR ELECTRICITY AND MAINTENANCE OF THE AIR CONDITIONING AT $0.226, YET NO EFFORT WAS MADE TO ASCERTAIN THE COST OF SUCH ITEMS INCLUDED IN THE $1.12 OFFER. IT DOES NOT APPEAR THAT ANY COST BREAKDOWN WAS OBTAINED FROM CROWLEY, MILNER TO ASCERTAIN WHETHER SOME BASIS EXISTED FOR NEGOTIATING A PRICE WITHIN THE 15 PERCENT STATUTORY LIMIT. FURTHER, WE BELIEVE THAT EFFECTIVE BARGAINING WOULD HAVE REQUIRED GSA TO INDICATE TO SUCH LESSOR THAT ITS PRICE EXCEEDED THE ESTIMATED ECONOMY ACT LIMITATION SO THAT IT COULD HAVE TAKEN THAT FACT INTO CONSIDERATION IN REVISING ITS PRICE OR POSSIBLY COULD HAVE ESTABLISHED A BASIS FOR A DIFFERENT FAIR MARKET VALUE APPRAISAL SO AS TO AFFECT THE STATUTORY LIMITATION.

FURTHER, IT IS OBSERVED THAT IN ESTIMATING THE ECONOMY ACT LIMITATION, GSA RELIED ON ESTIMATES OF COST OF SERVICES AND UTILITIES FURNISHED TO GSA IN JANUARY 1966 INSTEAD OF OBTAINING CURRENT ESTIMATES.

OUR REPRESENTATIVE WHO EXAMINED THE GSA FILES FOUND NO RECORD SHOWING THE BASIS FOR THE DETERMINATION THAT A NEW APPRAISAL OF THE CROWLEY-MILNER PREMISES WOULD NOT HAVE QUALIFIED THE $1.12 PRICE UNDER THE ECONOMY ACT. ALTHOUGH THERE ARE STATEMENTS IN THE FILE AFTER THE PROTEST WAS LODGED TO THE EFFECT THAT THE 1966 APPRAISAL WOULD NOT CHANGE BECAUSE OF THE LOCATION AND THE CHARACTER OF THE BUILDING, WE FOUND NO STATEMENTS IN THE RECORD TO THAT EFFECT PRIOR TO THE DATE OF THE PROTEST. FURTHER, THERE EXISTS A DISPUTE WHETHER THE INDEPENDENT APPRAISER EVER CONCURRED IN SUCH A DETERMINATION. ALTHOUGH WE MAY NOT UNDERTAKE AN APPRAISAL OF THE FAIR MARKET VALUE OF THE PREMISES, WE HAVE ASCERTAINED THAT THE JANUARY 1966 APPRAISAL SHOWS A HIGHER FAIR RENTAL VALUE FOR AIR-CONDITIONED SPACE THAN IT DOES FOR NON-AIR CONDITIONED SPACE. ALSO, THE GSA REGIONAL APPRAISER ESTIMATED IN 1963 THAT AIR CONDITIONING OF THE CROWLEY-MILNER PREMISES WOULD INCREASE THE FAIR MARKET VALUE OF THE PROPERTY BY ABOUT 16 PERCENT. FURTHER, ON JUNE 15, 1967, JUST ABOUT 4 MONTHS PRIOR TO THE RECEIPT OF THE OCTOBER 6 LETTER FROM CROWLEY, MILNER, THE GSA ASSISTANT COMMISSIONER FOR SPACE MANAGEMENT PREPARED A MEMORANDUM WHICH STATED THAT "THE VALUE OF THE SPACE WILL BE ENHANCED BY THE AIR CONDITIONING AND UNDOUBTEDLY IT WILL MAKE THE SPACE MORE APPEALING TO PROSPECTIVE TENANTS IN THE FUTURE." WHETHER THERE WERE UNUSUAL CIRCUMSTANCES WHICH OCCURRED IN THE SHORT INTERVAL THEREAFTER TO AFFECT THE VALUE OF THE PROPERTY IS NOT APPARENT, BUT ALL OTHER INDICATIONS ARE THAT THE APPRAISED VALUE OF THE PROPERTY SHOULD HAVE INCREASED BY THE ADDITION OF AIR CONDITIONING. IN ANY EVENT, BY NOT ADVISING CROWLEY, MILNER THAT ITS OFFER EXCEEDED THE ECONOMY ACT LIMITATION, IT WAS DENIED AN OPPORTUNITY TO SHOW WHETHER ITS OFFER COULD QUALIFY UNDER THE ECONOMY ACT AND TO NEGOTIATE ITS PRICE DOWNWARD.

WE THEREFORE CONCLUDE THAT PROPER PROCUREMENT PROCEDURES AS ENVISAGED BY THE REGULATIONS WERE NOT FOLLOWED. HOWEVER, SINCE THE LEASE WAS AWARDED IN MAY 1968 AND, AS A CONSEQUENCE, THE LESSOR HAD INCURRED CONSIDERABLE EXPENSES ESTIMATED AT ABOUT $1,300,000, NO ACTION WILL BE TAKEN BY OUR OFFICE TO DISTURB THE AWARD. WE TRUST THAT APPROPRIATE STEPS WILL BE TAKEN TO PRECLUDE THE RECURRENCE OF A SIMILAR SITUATION.