B-238872, Oct 19, 1990, 90-2 CPD ***

B-238872: Oct 19, 1990

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Is not subject to the laws governing the disposal of government property as long as the government obtains more favorable terms under the new lease. Customs Service (Customs) may exercise its option to purchase aircraft that it currently leases and simultaneously sell the same aircraft to a contractor that will lease the aircraft back to Customs at a rate significantly lower than the rate it now pays. Four of the planes that Customs uses are Cessna Citation II aircraft. Which are leased from the manufacturer. /2/ Customs began leasing these planes several years ago and has since modified the aircraft to include features such as an integrated Infrared Detection System and F-16 Radar. The leasing agreement between Customs and Cessna was originally due to expire on November 30.

B-238872, Oct 19, 1990, 90-2 CPD ***

PROCUREMENT - Special Procurement - Methods/Categories - Lease/purchase options - Use DIGEST: Customs, using its authority to procure a lease, may exercise its purchase option to leased aircraft through a direct purchase, by use of the agency of or, alternatively, through an assignment to a third party leasing firm supplying its own funds, for the purpose of obtaining a new lease from the leasing firm at a reduced rate and with other favorable lease terms. This procedure, a third party leaseback, is not subject to the laws governing the disposal of government property as long as the government obtains more favorable terms under the new lease.

The Honorable Stan Parris

House of Representatives

Dear Mr. Parris:

By letter dated February 20, 1990, you asked for our opinion on whether the U.S. Customs Service (Customs) may exercise its option to purchase aircraft that it currently leases and simultaneously sell the same aircraft to a contractor that will lease the aircraft back to Customs at a rate significantly lower than the rate it now pays. We conclude that Customs, using its authority to procure a lease, may enter into the proposed arrangement.

The U.S. Customs Service uses airplanes fitted with special radar in conducting surveillance activities aimed at drug interdiction. Four of the planes that Customs uses are Cessna Citation II aircraft, which are leased from the manufacturer. /2/ Customs began leasing these planes several years ago and has since modified the aircraft to include features such as an integrated Infrared Detection System and F-16 Radar.

The leasing agreement between Customs and Cessna was originally due to expire on November 30, 1989. /2/ In September 1989, Customs issued a notice of intent to enter into a sole source contract. By letter dated November 16, 1989, Customs sent notice to potential bidders, identified through a survey, that it planned to enter into a new agreement at the expiration of the old agreement. Customs explained in the letter that since the Cessna aircraft had been modified to meet the needs of the agency, it did not appear feasible that another source could provide conforming aircraft. Thus, Customs concluded that it did not anticipate a competitive procurement to establish the new leasing agreement.

In response to the notice from Customs, Aviation Enterprises, Inc. (Aviation), one of the potential bidders that received the November 16 letter, submitted the following proposals: it suggested that Customs either (1) exercise its option to purchase the Cessna aircraft and simultaneously sell the same aircraft to Aviation, which would then lease back the aircraft to Customs at a rate significantly lower than that which the agency paid Cessna, or (2) assign its purchase right to Aviation so that the contractor could purchase the aircraft and lease them back to Customs at a rate significantly lower than that which the agency paid Cessna.

By letter of February 12, 1990, Customs stated that it had "neither the authority nor the funding to purchase the Citation II aircraft" and that it knew of no authority outside of the Federal Property Management Regulations (41 CFR, Part 101) that would permit the agency to sell the aircraft. Further, Customs stated that the contract with Cessna contains no provision permitting the assignment of the purchase option to a commercial entity, and no other authority exists that would allow Customs to assign a right under contract to a third party commercial entity. Thus, Customs ruled that the Aviation proposals were nonresponsive to the needs of the agency.

In prior decisions, we approved arrangements similar to those proposed by Aviation, whereby, pursuant to its authority to lease, a government agency (1) purchased leased equipment from the lessor through the agency and by the use of the funds of a third party leasing firm; or, alternatively, (2) assigned the purchase option to leased equipment to a third party leasing firm to allow the firm to purchase the equipment using its own funds. either case, after obtaining title to the equipment, the leasing firm leased the equipment back to the government agency at a reduced rate and with other lease terms, including a purchase option, equal to or better than those under the old lease. The described arrangements are generally referred to as "third party leasebacks."

We first considered the arrangement in 1966, when the General Services Administration (GSA) proposed to use a third party leaseback to obtain a substantial reduction in the lease rate of automatic data processing (ADP) equipment. 45 Comp.Gen. 527 (1966). The leaseback arrangement that we considered in the decision is similar to Aviation's first proposal, i.e., the government purchasing the aircraft, then simultaneously selling it to the leasing firm. The two arrangements vary slightly in that Aviation proposes that the government directly purchase the leased equipment, while GSA proposed to purchase the equipment through an agent.

In the 1966 decision, GSA, which was authorized to lease and purchase personal property under the Federal Property and Administrative Services Act, had several leasing agreements for ADP equipment with International Business Machines (IBM), the equipment manufacturer. In an effort to compete with IBM, numerous leasing firms offered to purchase the IBM equipment, then lease it to GSA at a savings of from 10 to 50 percent over the IBM lease rates. However, IBM refused to sell its equipment to any of the leasing firms and IBM's lease prohibited GSA from assigning its purchase option to the leasing firms.

In response to requests by several leasing firms, GSA developed a plan that would allow a competitively selected leasing firm to purchase the equipment from IBM as GSA's agent using GSA's purchase option, but using its own funds. In support of its proposal, GSA cited its authority under the Federal Property and Administrative Services Act to procure leases. We did not object to GSA's use of its leasing authority to enter into the leaseback arrangement. See 45 Comp.Gen. at 531.

Ten years later, we approved a number of other GSA plans to employ third party leasebacks. 55 Comp.Gen. 1012 (1976). One of the plans involved a leasing agreement that was virtually the same as Aviation's second proposal in that it involved the assignment of a purchase option to a third party leasing firm. /3/ Citing our 1966 decision, we concluded that the leaseback arrangement, including the assignment of the purchase option, was permissible. Id. at 1014-15.

The Treasury, Postal Service and General Government Appropriations Act, 1990 (Appropriations Act) provides Customs with the authority to lease aircraft. Pub.L. No. 101-136, 103 Stat. 783, 786 (1989). /4/ Customs, using this authority, may enter into either of the leaseback arrangements proposed by Aviation, i.e., through a direct purchase of the aircraft by Customs with a simultaneous sale of the aircraft to Aviation, or through an assignment of the purchase option to Aviation. /5/ See 55 Comp.Gen. 1012; 45 Comp.Gen. 527.

With regard to Aviation's first proposal, Customs asserts that it cannot enter into a leaseback arrangement because it has no authority to exercise its purchase option to the Cessna aircraft, either directly or through an agent. Customs notes that while its appropriations are available to lease aircraft, it may acquire aircraft only by "transfer or acquisition from any other agency." 103 Stat. at 786. /6/

In our opinion, Customs does not need authority to purchase the aircraft in order to accomplish a third party leaseback. In the decisions discussed above, we held that the purpose of a third party leaseback is to obtain more favorable terms under a leasing agreement, not to vest title to leased equipment in the government. See 55 Comp.Gen.at 1015; 45 Comp.Gen. at 531. We stated in the 1966 decision that "the purchase, transfer of title, and leaseback of the equipment" legally constitutes a "single transaction." 45 Comp.Gen. at 531. In this regard, the decision established the principle that the government, though needing specific authority to accomplish, as separate transactions, the purchase, transfer of title and leaseback of equipment, needs only the authority to lease in order to accomplish the simultaneous purchase, transfer of title and leaseback of equipment under a third party leaseback.

Hence, even if Customs is without the authority to purchase the aircraft from Cessna, it may exercise its purchase option to the aircraft as a part of a leaseback arrangement. Under the third party leaseback, Customs' exercise of the purchase option would not undermine congressional control over federal expenditures and procurements since the leasing firm would fund the purchase of and obtain the title to the aircraft. The leaseback arrangement would serve the sole purpose of "enabling the leasing firm to acquire the equipment so that it may lease it to the Government at a lower rental than the Government was previously paying." See id.

Similarly, the disposal provisions of the Federal Property Management Regulations do not pose an obstacle, as Customs has suggested, to the transfer of the aircraft's title to the leasing firm after the government makes the purchase. These regulations implement the Federal Property and Administrative Services Act, which authorizes the disposal of government- owned property, but only when it becomes surplus to the needs of the government. 40 U.S.C. Sec. 471. The property which would be the subject of the leaseback clearly cannot be considered surplus. However, we concluded in our 1966 decision that even though the title to the equipment would vest in the government upon the agent's exercise of the government purchase option, the equipment could not properly be considered government property since the leaseback arrangement would require the government to simultaneously transfer the title to the leasing firm. As a consequence, the disposal law would not apply. 45 Comp.Gen. at 531.

The disposal law also would not apply to an assignment by the government. In the 1976 case, we determined that GSA's proposed assignment of the purchase option involved the transfer of certain property rights to the leasing firm. We concluded that the disposal law would not apply to the assignment since the government would obtain property rights /7/ under the new lease that are as good as or better than those conferred under the terms of the old lease. 55 Comp.Gen. at 1015. Thus, we viewed the assignment, including the transfer of rights, as a component of the procurement of a new lease, not as a disposal of property.

Customs also stated that its lack of authority to assign its purchase option would defeat Aviation's second proposal. We suggest that Customs review its lease with Cessna to establish whether there is an express prohibition against the assignment of the purchase option. We note that a lessee may assign a purchase option unless the lease expressly prohibits the assignment. See 4 Corbin on Contracts 883. In our review of Customs' leasing agreement with Cessna, we found no provision which prohibits or would otherwise preclude Customs from assigning the purchase option. Customs is uncomfortable assigning its purchase option, it may pursue the leaseback through an agency or a purchase and simultaneous sale. See, e.g., 45 Comp.Gen. 527.

We conclude, therefore, that Customs, using its authority to procure a lease, may enter into the proposed leaseback arrangements to obtain reduced rates so long as its new lease agreement contains terms that are at least as favorable as those in its old lease. 55 Comp.Gen. at 1015. Customs, however, should not restrict itself to an offer from a single easing firm, but should employ the third party leaseback procedure only after competitively selecting a leasing firm.

/1/ Under the terms of the leasing agreement with Cessna, Customs has an unrestricted option to purchase the four planes. The agreement also stipulates that a portion of each lease payment accrues as a credit towards Customs' purchase of the aircraft.

/2/ Customs officials inform us that Customs extended, via letter contract, the leasing agreement through October 19, 1990.

/3/ Unlike the leasing agreement in the prior decision, the lease under the later plan did not prohibit GSA from assigning its purchase option.

/4/ Customs' fiscal year 1991 appropriations bill would also provide Customs the authority to lease aircraft. H.R. 5241, 101st Cong., 2d Sess. (1990).

/5/ In our opinion, there would be no significant legal distinction between Customs exercising its purchase option directly as opposed to exercising it through an agent as GSA did in 1966. See 45 Comp.Gen. at 531. In both situations, the title would vest temporarily in Customs, then, pursuant to the terms of the leaseback arrangement, transfer immediately to the leasing firm.

/6/ Even though Customs has no authority to purchase aircraft, it may include a purchase option in its leases. See 38 Comp.Gen. 227 (1958), in which we held that we would not object to including a purchase option in a lease even though the agency, at the time it procures the lease, has no authority to purchase the property, so long as the agency has determined that it would be in the best interests of the government to create an opportunity to buy the leased property at the end of the lease term if, at that time, acquisition of the property should be considered advantageous.

/7/ The 1966 decision specifically noted the need for the maintenance or enhancement of the following rights when the government enters a new lease: (1) the purchase option, (2) the accrued purchase credits, (3) the unilateral cancellation provision, and (4) the equipment service contract. 45 Comp.Gen. at 528.