General Services Administration's Lease Versus Construction Present-Value Cost Analyses Submitted to the Congress Were Inaccurate

LCD-80-61: Published: Jun 20, 1980. Publicly Released: Jun 30, 1980.

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In response to a congressional request, GAO reviewed the lease versus construction present-value cost comparison procedures prescribed by the Office of Management and Budget (OMB) and the accuracy of General Services Administration (GSA) present-value cost analyses in prospectuses submitted to Congress.

GAO found that the GSA lease versus construction present-value cost analyses in five lease prospectuses submitted to Congress in 1979 were inaccurate, and therefore, did not provide a reliable basis for evaluating acquisition alternatives. The analyses (1) were based on incorrect operating cost estimates, (2) omitted some relevant costs, (3) contained computational errors, (4) did not reflect rental payments escalated at renewal periods, (5) assumed an unrealistic year of occupancy, (6) did not consider the lack of comparability between federally constructed and leased privately constructed buildings, and (7) used an inappropriate discount rate. Present-value analysis can be a useful tool in evaluating the comparative costs of investment alternatives, provided that underlying assumptions and criteria are applied objectively and consistently. GAO disagrees with the OMB prescribed 7-percent discount rate, price deflator for leasing costs, and assumption that construction costs are paid in a lump sum as of the present-value date and therefore not discounted. Decisions to lease have been based primarily on the lack of construction funds, regardless of present-value analysis results. Proposed legislation would require emphasis on, and disclosure of, GSA long-range planning for its public buildings program. GAO believes the legislation would provide Congress with a better overview of the GSA buildings program.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Administrator of General Services should direct that present-value analyses (1) be based on correct operating cost estimates, (2) include all relevant costs, (3) are computed accurately, (4) reflect rental payments escalated at renewal periods, and (5) assume a realistic year of occupancy. The Director of OMB should revise OMB Circular No. A-104 to provide that the discount rate, to be used in comparative cost analyses for decisions to lease or construct general purpose real property, will be based on the average yield on outstanding marketable Treasury obligations with remaining maturities comparable to the analysis period.

    Agency Affected:

 

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