Matter of: General Services Administration refinancing of purchase contracts under 40 U.S.C. Sec. 602a File: B-250236 Date: September 9, 1992

B-250236: Sep 9, 1992

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Is permissible under 40 U.S.C. 1975 does not apply to refinancing debt as proposed by GSA because no "new" building projects or other substantive modifications are contemplated. GSA is authorized to enter into purchase contracts for the construction of public buildings and to make payment for the buildings over a period not to exceed thirty years. Because current interest rates are more favorable than those contained in the Public Buildings Purchase Contract and Trust Indentures. GSA estimates that the United States will "realize significant savings" by refinancing and. That refinancing will result in a present value savings in the magnitude of $18. We have previously advised GSA concerning contracting or financing proposals which were not explicitly authorized under 40 U.S.C.

Matter of: General Services Administration refinancing of purchase contracts under 40 U.S.C. Sec. 602a File: B-250236 Date: September 9, 1992

PROCUREMENT Payment/Discharge Payment terms Contracts Refinancing Authority A proposal by the General Services Administration to refinance purchase contracts entered into for the construction of public buildings by substituting the Federal Financing Bank for the current debt holders, thereby reducing interest charges, is permissible under 40 U.S.C. Sec. 602a. The prohibition in 40 U.S.C. Sec. 602a(g) against entering into purchase contracts after June 30, 1975 does not apply to refinancing debt as proposed by GSA because no "new" building projects or other substantive modifications are contemplated.

DECISION

The General Counsel of the General Services Administration (GSA) asks whether GSA has the authority to refinance its existing lease purchase contract debt incurred under 40 U.S.C. Sec. 602a by substituting the Federal Financing Bank for the current debt holders. For the reasons discussed below, we conclude that GSA has the authority to refinance this debt.

BACKGROUND

Under section 5 of the Public Buildings Amendments of 1972, Pub. L. No. 92-313, 86 Stat. 219-220, codified at 40 U.S.C. Sec. 602a (1988), GSA is authorized to enter into purchase contracts for the construction of public buildings and to make payment for the buildings over a period not to exceed thirty years. Subsection (g) provides that use of this contracting authority expired June 30, 1975. The legislative history indicates that Congress intended the three-year purchase contract authority to be a "stop-gap expedient" to expedite the then-existing construction backlog of federal buildings. H. R. Rep. No. 989, 92nd Congress, 2d Sess. 8, reprinted in 1972 U.S. Code Cong. & Admin. News 2370, 2373. Purchase contract authority permitted GSA to make regular payments over a period of from ten to thirty years to persons who would finance and construct buildings to GSA specifications. At or before the end of the contract term, title to a building would vest in the United States. Id.

According to the GSA's submission, GSA initially exercised its purchase contract authority by obtaining private sector financing and by entering into "Public Buildings Purchase Contract and Trust Indentures" which contain a right of redemption. In later transactions, GSA obtained financing from the Federal Financing Bank. Because current interest rates are more favorable than those contained in the Public Buildings Purchase Contract and Trust Indentures, GSA proposes to exercise its right of redemption and refinance this debt at the current lower rates. GSA would accomplish the refinancing by obtaining funds from the Federal Financing Bank to pay off the existing debt.

Under the terms of the replacement purchase contracts with the Federal Financing Bank, the original debt would be extinguished and GSA would then be obligated to the Federal Financing Bank to make the remaining installment payments necessary to purchase the buildings. The term of the replacement purchase contracts would not extend past the originally established maturity dates. GSA estimates that the United States will "realize significant savings" by refinancing and, assuming interest rates remain the same, that refinancing will result in a present value savings in the magnitude of $18,000,000.

ANALYSIS

The basic issue to be resolved here concerns the applicability to GSA's proposed refinancing of the statutory prohibition in 40 U.S.C. Sec. 602a(g) against entering into purchase contracts after June 30, 1975 (the statutory cutoff date).

We have previously advised GSA concerning contracting or financing proposals which were not explicitly authorized under 40 U.S.C. Sec. 602a. [1] In B-177610, April 26, 1976, we permitted a project which had initially been designated for construction under a purchase contract entered into prior to the statutory cutoff date in 40 U.S.C. Sec. 602a(g), to be transferred to another pre-existing purchase contract after the statutory cutoff date in order to reduce financing costs. We stated that the statutory cutoff date is directed at preventing the placing of any project not previously covered by a purchase contract under a purchase contract after the cutoff date, and not at halting action on projects already covered by existing purchase contracts.

Whether a "project" [2] is still considered covered by a purchase contract executed prior to the statutory cutoff date because of the effect of an amendment or modification,

"can only be answered by considering the nature and degree of such changes and not by the fact that they took place after [the statutory cutoff date]. If the project as amended or modified is substantially the same as the project initially placed under purchase contract, then, in our opinion, it is not in violation of the [statutory cutoff date]. However, if the amendment or modification substantially changes the project from one originally considered and approved [by Congress], it thereby creates a "new" project, and it would be in violation of the prohibitions [of the statutory cutoff date]. Naturally, such a question is one which can only be determined on the specific facts involved on a case-by-case basis."

In the present case, GSA's proposed refinancing would not alter the building projects themselves and would thus not create "new" projects. GSA is merely substituting one creditor for another. Moreover, GSA is not extending the payment terms of the original contracts or making other substantive modifications to the projects that are not consistent with the underlying statutory authority. Since presumably all project construction originally contracted for between 1972-75 has long been completed, the replacement of the original purchase contracts for the sole purpose of achieving more favorable financing terms for the United States is unobjectionable. Accordingly, we do not interpret the prohibition in 40 U.S.C. Sec. 602a(g) so strictly as to preclude GSA from refinancing existing debt properly incurred under the authority of 40 U.S.C. Sec. 602a for the purpose of obtaining lower interest rates for the United States.

We also note that since no new building projects, or modifications to existing projects, are being contemplated under the replacement purchase contracts, GSA is not sidestepping Congressional prospectus approval requirements. Other than reduced financing costs, we understand that the projects remain the same as originally approved. We recommend, however, that GSA informally advise the relevant Congressional committees concerning the terms of the proposed refinancing plan. [3]

optional additional last paragraph:

None of the other provisions of 40 U.S.C. Sec. 602a preclude the proposed refinancing of the purchase contracts. Subsection (b) provides that

"[n]o such purchase contract shall provide for any payments to be made by the United States in excess of the amount necessary, as determined by the Administrator [of General Services] to . . . (2) provide a reasonable rate of interest on the outstanding principal. . . ."

What was a "reasonable rate of interest" at the time the purchase contracts were entered into may no longer be so given the generally lower interest rates at the present time. Because Congress gave the Administrator the power to determine a "reasonable rate of interest" it follows that refinancing at lower interest rates may be considered within the scope of the legislation. Furthermore, subsection (e) authorizes the Administrator "to enter into agreements with any person, copartnership, corporation, or other public or private entity, to effectuate any of the purposes of this section . . . ." This language gives the Administrator broad authority and certainly does not appear to preclude refinancing existing purchase contracts with the Federal Financing Bank.

1. In 52 Comp.Gen. 226 (1972) and 52 Comp.Gen. 517 (1973), we approved GSA's proposal to use a "dual system" of contracting for public buildings projects. Under this plan, GSA issued separate invitations for (1) bids for construction of individual projects, and (2) bids to finance and sell to the United States a group of such projects. Following competitive bidding, GSA would accept the most favorable construction bid for each project by entering into a construction contract, and accept the most favorable financing bid to provide the funds for the group of projects as a whole by entering into a purchase contract with a trustee. The trustee would obtain the necessary funds through issuance of participation certificates to the successful financial bidders. The Comptroller General found this proposal to be within the legal framework of 40 U.S.C. Sec. 602a even though this method of financing construction was not explicitly authorized in the statute.

2. We noted in B-177610, April 26, 1976, that "[a]lthough the statutory cutoffs are written in terms of purchase contracts as such, rather than the actual projects financed thereunder, GSA recognizes--correctly, in our view--that the cutoff operates in practice on the basis of projects as well."

3. We note that Congress intended that a purchase contract building remain on the local tax rolls, "helping to ease the burdens of the Federal presence upon the local community," until title vests in the United States. H. R. Rep. No. 989, 92nd Congress, 2d Sess. 8, reprinted in 1972 U.S. Code Cong. & Admin. News 2370, 2373. 40 U.S.C. Sec. 602a(d). A GSA official informally advised us that the refinancing of the purchase contracts will not advance the date title vests in the United States, and local taxes will continue to be paid.