B-24133, APRIL 4, 1942, 21 COMP. GEN. 906

B-24133: Apr 4, 1942

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TO PREMISES OCCUPIED RENT FREE OR AT A NOMINAL RENT ARE TO BE REGARDED AS RENT. " MUST BE CONSIDERED AS APPLICABLE WHERE PREMISES ARE OCCUPIED RENT FREE OR AT A NOMINAL RENTAL. WHEN PREMISES ARE OCCUPIED UNDER A LEASE COVERING A FRACTION OF A YEAR WITH THE PRIVILEGE OF RENEWAL. 1942: I HAVE YOUR LETTER OF FEBRUARY 24. AS FOLLOWS: THERE IS PRESENTED FOR YOUR CONSIDERATION THE FOLLOWING MATTERS INVOLVING ALTERATIONS. THERE HAVE BEEN AND ARE BEFORE THIS OFFICE FOR CONSIDERATION NUMEROUS CASES INVOLVING ALTERATIONS. THE MOST IMPORTANT POINT FOR CONSIDERATION UNDER SUCH AN INTERPRETATION IS THE GENERAL DIFFICULTY IN SECURING ESTIMATES ON BUILDINGS OR QUARTERS OF THE NATURE OF THOSE IN WHICH THE MAJORITY OF SELECTIVE SERVICE RENT-FREE OFFICES ARE CONTAINED.

B-24133, APRIL 4, 1942, 21 COMP. GEN. 906

REPAIRS AND IMPROVEMENTS UNDER RENT-FREE AND NOMINAL-RENT LEASES AMOUNTS EXPENDED BY THE GOVERNMENT FOR REPAIRS, ETC., TO PREMISES OCCUPIED RENT FREE OR AT A NOMINAL RENT ARE TO BE REGARDED AS RENT. SECTION 322 OF THE ACT OF JUNE 30, 1932, AS AMENDED, LIMITING THE AMOUNT WHICH MAY BE PAID FOR RENT OF LEASED PREMISES AND THAT WHICH MAY BE EXPENDED FOR REPAIRS, ETC., THERETO "WHERE THE RENTAL TO BE PAID SHALL EXCEED $2,000 PER ANNUM," MUST BE CONSIDERED AS APPLICABLE WHERE PREMISES ARE OCCUPIED RENT FREE OR AT A NOMINAL RENTAL, IF THE AMOUNT PROPOSED TO BE EXPENDED FOR REPAIRS, ETC., PLUS THE NOMINAL RENTAL, IF ANY, EXCEEDS $2,000. AMOUNTS IN EXCESS OF $2,000 PROPOSED TO BE EXPENDED BY THE GOVERNMENT FOR REPAIRS, ETC., TO PREMISES OCCUPIED RENT FREE OR AT A NOMINAL RENT, PLUS ANY NOMINAL RENT, MUST NOT EXCEED THE 15 PERCENT OF THE FAIR-MARKET-VALUE RENTAL LIMITATION CONTAINED IN SECTION 322 OF THE ACT OF JUNE 30, 1932, AS AMENDED, WHICH BECOMES APPLICABLE WHEN THE RENT FOR LEASED PREMISES EXCEEDS $2,000 PER ANNUM. WHEN PREMISES ARE OCCUPIED UNDER A LEASE COVERING A FRACTION OF A YEAR WITH THE PRIVILEGE OF RENEWAL, THE FIRST 12 MONTHS OF OCCUPANCY CONSTITUTE "THE FIRST YEAR OF THE RENTAL TERM" WITHIN THE MEANING OF SECTION 322 OF THE ACT OF JUNE 30, 1932, AS AMENDED, LIMITING THE AMOUNT WHICH MAY BE EXPENDED BY THE GOVERNMENT FOR REPAIRS, ETC., TO LEASED PREMISES.

COMPTROLLER GENERAL WARREN TO THE DIRECTOR OF SELECTIVE SERVICE, APRIL 4, 1942:

I HAVE YOUR LETTER OF FEBRUARY 24, 1942, FILE 7-2.18-54-B, AS FOLLOWS:

THERE IS PRESENTED FOR YOUR CONSIDERATION THE FOLLOWING MATTERS INVOLVING ALTERATIONS, IMPROVEMENTS, AND REPAIRS OF RENT-FREE PREMISES OCCUPIED BY FIELD OFFICES OF THE SELECTIVE SERVICE SYSTEM.

THE SELECTIVE SERVICE SYSTEM HAS THUS FAR BEEN ABLE TO LOCATE APPROXIMATELY 35 PERCENT OF ITS APPROXIMATELY 7,000 FIELD OFFICES IN RENT- FREE QUARTERS IN STATE, COUNTY, MUNICIPAL, AND PRIVATELY OWNED BUILDINGS. THERE HAVE BEEN AND ARE BEFORE THIS OFFICE FOR CONSIDERATION NUMEROUS CASES INVOLVING ALTERATIONS, IMPROVEMENTS, AND REPAIRS OF RENT-FREE QUARTERS. WHILE CONSIDERABLE STUDY AND RESEARCH HAS BEEN MADE OF APPLICABLE LAW AND DECISIONS, THERE DO NOT APPEAR TO BE AVAILABLE SUFFICIENT REFERENCES RELATING TO THE APPLICABILITY OF PROVISIONS OF SECTION 322 OF THE ECONOMY ACT OF JUNE 30, 1932, 47 STAT. 412, AS AMENDED, WITH PARTICULAR REFERENCE TO RENT-FREE PREMISES, TO PERMIT OF UNIFORM DETERMINATIONS OF THE EXTENT TO WHICH FEDERAL FUNDS MAY BE OBLIGATED IN EFFECTING ALTERATIONS, IMPROVEMENTS, AND REPAIRS TO RENT-FREE PREMISES. IT THEREFORE APPEARS NECESSARY THAT THIS OFFICE SECURE MORE INFORMATION ON THE SUBJECT IN ORDER THAT ADMINISTRATIVE PROVISIONS NOW INCLUDED UNDER PARAGRAPH 608.11 OF SELECTIVE SERVICE REGULATIONS BE AMPLIFIED, IF REQUIRED.

ONE POSSIBLE INTERPRETATION OF THE APPLICABILITY OF THE PROVISIONS OF THE ECONOMY ACT TO RENT-FREE PREMISES APPEARS TO BE THAT, STRICTLY SPEAKING, IN ORDER TO ARRIVE AT A FAIR RENTAL VALUE, ONE MUST RETURN TO THE ORIGINAL BASE APPARENTLY FOR CONSIDERATION--- NAMELY, FAIR MARKET VALUE, AND BY COMPUTING 15 PERCENT OF THE FAIR MARKET VALUE ARRIVE AT THE FAIR RENTAL VALUE UPON WHICH A FURTHER COMPUTATION OF 25 PERCENT MUST BE MADE TO ARRIVE AT THE PROPER AMOUNT FOR WHICH APPROVAL MAY BE GIVEN FOR ALTERATIONS, IMPROVEMENTS, AND REPAIRS. THE MOST IMPORTANT POINT FOR CONSIDERATION UNDER SUCH AN INTERPRETATION IS THE GENERAL DIFFICULTY IN SECURING ESTIMATES ON BUILDINGS OR QUARTERS OF THE NATURE OF THOSE IN WHICH THE MAJORITY OF SELECTIVE SERVICE RENT-FREE OFFICES ARE CONTAINED. IF IT MAY BE ASSUMED THAT THE GENERAL INTENT OF THE ECONOMY ACT WAS TO LIMIT WITHIN ECONOMICAL BOUNDS THE AMOUNT OF EXPENDITURES OF FEDERAL MONEYS FOR RENTED SPACE, THE QUESTION MIGHT BE RAISED AS TO WHETHER THE PROVISIONS OF THE REFERRED-TO ACT ARE FOR A STRICT APPLICATION TO RENT- FREE PREMISES SINCE THERE IS A DEFINITE AND IMMEDIATE ECONOMY TO THE SECURING OF RENT-FREE PREMISES.

IN VIEW OF THE APPARENTLY UNQUESTIONABLE DIFFICULTY OF SECURING ESTIMATES OF FAIR MARKET VALUES, PARTICULARLY IN BUILDINGS OF THE CHARACTER OF STATE CAPITOLS WHERE COST FACTORS MIGHT HAVE NO DIRECT RELATION TO USE FACTORS, IT MIGHT APPEAR THAT ESTIMATES OF FAIR RENTAL VALUES BY QUALIFIED PARTIES, USING AS A GENERAL BASE OF VALUATION THE AVERAGE RENTAL OF SIMILARLY LOCATED AND EQUIPPED QUARTERS, WOULD PROVIDE AS SATISFACTORY A BASE FOR COMPUTATIONS AS ESTIMATES OF FAIR MARKET VALUE, ESPECIALLY SINCE THE ELEMENTS FOR CONSIDERATION IN DETERMINING FAIR RENTAL VALUE ARE NOT AS COMPLEX AS THOSE USED IN DETERMINING FAIR MARKET VALUE. IT MIGHT ALSO APPEAR THAT SINCE FAIR RENTAL VALUE ESTIMATES GENERALLY INVOLVE MORE CURRENT AND PRACTICAL FACTORS THAN ESTIMATES WHEREIN WIDELY VARYING COST AND DEPRECIATION FACTORS ARE INVOLVED, THERE MAY ACTUALLY BE RECEIVED ESTIMATES WHICH OFFER MORE PROTECTION TO THE INTERESTS OF THE UNITED STATES.

THERE ARE SUBMITTED THE FOLLOWING SPECIFIC QUESTIONS:

1. ARE THE LIMITATIONS ON THE AMOUNTS WHICH MAY BE EXPENDED FOR ALTERATIONS, IMPROVEMENTS, AND REPAIRS OF RENTED PREMISES, WHICH ARE CONTAINED IN SECTION 322 OF THE ECONOMY ACT OF JUNE 30, 1932, AS AMENDED, APPLICABLE TO PREMISES OCCUPIED RENT FREE OR AT A NOMINAL RENTAL?

2. IN DETERMINING THE MAXIMUM AMOUNTS THAT MAY BE EXPENDED FOR ALTERATIONS, IMPROVEMENTS, AND REPAIRS TO PREMISES OCCUPIED RENT FREE, OR AT A NOMINAL RENTAL, IS IT NECESSARY IN ALL CASES TO COMPUTE SUCH AMOUNTS BY TAKING ONE-FOURTH OF 15 PERCENT OF THE FAIR MARKET VALUE OF THE PREMISES OCCUPIED?

3. IF YOUR ANSWER TO THE PRECEDING QUESTION IS IN THE NEGATIVE, WOULD IT BE PROPER TO (1) OBTAIN ESTIMATES OF THE FAIR RENTAL VALUE OF THE QUARTERS OCCUPIED, OR, WHEN QUARTERS ARE OCCUPIED IN A PUBLIC BUILDING, TO OBTAIN ESTIMATES OF THE AMOUNT THAT WOULD NECESSARILY HAVE TO BE PAID AS RENT IF SIMILAR OR OTHER SUITABLE QUARTERS WERE TO BE OCCUPIED AND IT WERE NECESSARY TO PAY A SUBSTANTIAL RENTAL, AND (2) COMPUTE THE MAXIMUM AMOUNT THAT COULD BE EXPENDED FOR ALTERATIONS, IMPROVEMENTS, AND REPAIRS BY TAKING ONE-FOURTH OF THE ESTIMATED FAIR RENTAL VALUE, OR THE ESTIMATED AMOUNT THAT WOULD HAVE TO BE PAID AS RENTAL IF SIMILAR OR OTHER SUITABLE QUARTERS WERE OCCUPIED?

4. IF IT IS PROPER TO USE THE FORMULA OUTLINED IN THE PRECEDING QUESTION, IN ORDER TO COMPUTE THE MAXIMUM AMOUNT THAT COULD BE EXPENDED FOR ALTERATIONS, IMPROVEMENTS, AND REPAIRS, WOULD IT BE NECESSARY, WHEN THE AMOUNT THAT WOULD OTHERWISE BE PAID AS RENTAL IS SO OBTAINED IS AN AMOUNT IN EXCESS OF $2,000, TO MAKE A FURTHER DETERMINATION THAT THIS AMOUNT DOES NOT EXCEED 15 PERCENT OF THE FAIR MARKET VALUE OF THE QUARTERS OCCUPIED, AND IF IT DOES TO LIMIT THE AMOUNT THAT MAY BE SO EXPENDED TO ONE-FOURTH OF 15 PERCENT OF THE FAIR MARKET VALUE?

5. IF PREMISES ARE OCCUPIED ON JANUARY 1 OF ANY YEAR UNDER LEASE, WITH A SUBSTANTIAL RENTAL CONSIDERATION AND WITH RENEWAL OPTIONS EXTENDING BEYOND THE TERMINATION OF THE IMMEDIATE LEASE PERIOD STATED TO BE JUNE 30 OF THAT YEAR, AND ALTERATIONS, IMPROVEMENTS, AND REPAIRS (NOT COVERED UNDER THE TERMS OF THE LEASE) ARE DESIRED TO BE MADE TO BE COMPLETED BY MARCH 1, SHALL COMPUTATIONS OF AMOUNTS AVAILABLE FOR SUCH ALTERATIONS, IMPROVEMENTS, AND REPAIRS, BE BASED ON THE FRACTIONAL PERIOD OF ONE YEAR FROM JANUARY 1 TO JUNE 30 OR, IN INSTANCES WHERE THE AMOUNT NECESSARY TO EFFECT REQUIRED IMPROVEMENTS IS MORE THAN THE AMOUNT COMPUTED ON A FRACTIONAL PART OF THE YEAR, MAY THE LEASE PERIOD FOR COMPUTATION PURPOSES BE CONSIDERED ONE YEAR?

6. WHEN QUARTERS ARE OCCUPIED RENT FREE IN PUBLIC BUILDINGS, AND THERE IS NO FORMAL LEASE FOR THE REASON THAT STATE OR LOCAL LAWS CONTAIN NO AUTHORITY FOR LEASING QUARTERS IN SUCH PUBLIC BUILDINGS, IS IT PROPER TO EXPEND ANY AMOUNT FOR ALTERATIONS, IMPROVEMENTS, OR REPAIRS OF THE QUARTERS OCCUPIED? IT IS UNDERSTOOD, OF COURSE, THAT IF ANY ALTERATIONS, IMPROVEMENTS, OR REPAIRS WERE DIRECTED TO BE MADE IN SUCH QUARTERS IT WOULD ONLY BE AFTER IT HAD BEEN ADMINISTRATIVELY DETERMINED THAT THERE WAS EVERY LIKELIHOOD THAT THE SELECTIVE SERVICE SYSTEM WOULD RECEIVE THE BENEFIT OF SUCH ALTERATIONS, IMPROVEMENTS, OR REPAIRS FOR A SUBSTANTIAL PERIOD OF TIME.

YOUR CONSIDERATION AND ADVICE ARE RESPECTFULLY REQUESTED.

IT IS A WELL-ESTABLISHED GENERAL RULE THAT APPROPRIATED FUNDS MAY NOT BE USED FOR THE PERMANENT IMPROVEMENT OF PRIVATELY OWNED PROPERTY BY AN AGENCY OF THE UNITED STATES. 15 COMP. GEN. 761; 19 ID. 528; 20 ID. 927. HOWEVER, AN EXCEPTION TO THIS RULE IS CONTAINED IN SECTION 322 OF THE ACT OF JUNE 30, 1932, 47 STAT. 412, AS AMENDED BY THE ACT OF MARCH 3, 1933, 47 STAT. 1517, WHICH PROVIDES:

HEREAFTER NO APPROPRIATION SHALL BE OBLIGATED OR EXPENDED FOR THE RENT OF ANY BUILDING OR PART OF A 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: PROVIDED,THAT THE PROVISIONS OF THIS SECTION SHALL NOT APPLY TO LEASES HERETOFORE MADE, EXCEPT WHEN RENEWALS THEREOF ARE MADE HEREAFTER, NOR TO LEASES OF PREMISES IN FOREIGN COUNTRIES FOR THE FOREIGN SERVICES OF THE UNITED STATES: PROVIDED FURTHER, THAT THE PROVISIONS OF THIS SECTION AS APPLICABLE TO RENTALS, SHALL APPLY ONLY WHERE THE RENTAL TO BE PAID SHALL EXCEED $2,000 PER ANNUM.

THIS STATUTORY PROVISION CONTEMPLATED NORMAL SITUATIONS IN WHICH THE PAYMENT OF AN ADEQUATE COMPENSATING RENTAL FOR OCCUPANCY HAS BEEN PROVIDED IN THE LEASE; AND, IN SUCH CIRCUMSTANCES, LIMITS THE AGGREGATE AMOUNT WHICH MAY BE EXPENDED FOR RENT AND FOR REPAIRS WITH RESPECT TO THAT PARTICULAR PROPERTY. WHILE THE PROVISO EXCEPTS FROM THE PROVISIONS OF THAT SECTION CASES IN WHICH THE RENT DOES NOT EXCEED $2,000 PER ANNUM, TO HOLD THAT THE SECTION IS NOT APPLICABLE WHEN NO ACTUAL RENT IS TO BE PAID OR WHEN THE ACTUAL CASH TO BE PAID IS ONLY $1 A YEAR PLUS EXTENSIVE ALTERATIONS, IMPROVEMENTS, AND REPAIRS AT THE EXPENSE OF THE GOVERNMENT, WOULD TO SOME EXTENT DEFEAT THE PURPOSE OF THE STATUTE AS IT WOULD THEN BE POSSIBLE TO LEASE PROPERTY OSTENSIBLY RENT FREE OR FOR ONLY $1 A YEAR AND YET COMPENSATE THE OWNER THEREOF BY MAKING IMPROVEMENTS TO AN EXTENT WHICH WOULD NOT HAVE BEEN AUTHORIZED FOR BOTH RENT AND IMPROVEMENTS HAD THE LEASE PROVIDED FOR A RENTAL ON THE BASIS OF 15 PERCENTUM OF THE FAIR MARKET VALUE OF THE PREMISES. THEREFORE, IT MUST BE CONSIDERED THAT THE PROVISIONS OF SAID ACT ARE FOR APPLICATION, NOTWITHSTANDING THAT THE LEASING OF THE PREMISES IS RENT FREE OR AT A NOMINAL RENTAL, IF THE LEASE OR OTHER AGREEMENT CONTEMPLATED ALTERATIONS, REPAIRS, OR IMPROVEMENTS AT THE EXPENSE OF THE UNITED STATES IN EXCESS OF $2,000, THE COST OF REPAIRS, ALTERATIONS, AND IMPROVEMENTS IN SUCH A CASE BEING REGARDED AS TANTAMOUNT TO OR IN LIEU OF RENT. HENCE, YOUR SPECIFIC QUESTIONS MAY BE ANSWERED AS FOLLOWS:

1. THE LIMITATIONS OF SECTION 322 OF THE ACT OF JUNE 30, 1932, AS AMENDED, ARE APPLICABLE TO PREMISES OCCUPIED RENT FREE OR AT A NOMINAL RENTAL WHERE THE AMOUNT PROPOSED TO BE EXPENDED FOR SUCH ALTERATIONS, IMPROVEMENTS, AND REPAIRS, PLUS THE NOMINAL RENT, EXCEEDS $2,000.

2. THIS QUESTION IS ANSWERED IN THE NEGATIVE. SINCE THE COST OF THE 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.

IT IS BELIEVED THAT THE ABOVE ANSWERS TO QUESTIONS 1 AND 2 MAKE IT UNNECESSARY TO ANSWER QUESTIONS 3, 4, AND 6.

5. WHEN PREMISES ARE OCCUPIED UNDER A LEASE COVERING THE LAST 6 MONTHS OR OTHER FRACTION OF A YEAR WITH THE PRIVILEGE OF RENEWAL, THE FIRST 12 MONTHS OF OCCUPANCY CONSTITUTE THE "FIRST YEAR OF THE RENTAL TERM.' COMP. GEN. 30; ID. 105.