oversight

Leasing Versus Buying Small and Medium Size Post Office Buildings

Published by the Government Accountability Office on 1971-03-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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Dear Mr.        Chairman:

      This is in response   to the Committee’s      request  of Septem-
ber 30, 1970, that we inform       you of the results    of our review
of the Post Office   Department’s     method of acquiring    small and
medium size post office    buildings.

        According     to the Postmaster     General’s      annual report         for
fiscal    year 1969, at June 30, 1969, the Department                    was occupy-
ing about 141 million          square feet of space in 30,378 buildings,
including      about 80 million      square feet of interior             space in
27,312 leased buildings,            During  fiscal     year 1969, the Depart-
ment awarded contracts          for the lease of 971 new or remodeled
buildings      for small and medium size postal            facilities        contain-
ing about 5.3 million          square feet of interior            space.     The De-
partment     estimated     that the lessors’       cost of constructing            or
remodeling       these leased buildings       amounted to about $88.2 mil-
lion a

        The Department             usually       acquired          new space for small and
medium size postal               facilities          under contracts             with private           in-
dustry     for the lease of buildings                        to be constructed              to the De-
partment’s         specifications             on sites         either        owned or controlled
by the Department,               pursuant        to authority             vested     in the Postmas-
ter General          to lease space for postal                      facilities         for periods
not to exceed 30 years                    (39 U.S.C.         2102-2103).           Before      enter-
ing into a lease agreement,                      the Postmaster               General was required
by 39 U.S.C.           2103(a)      to determine,              after      consultation         with the
Administrator           of General Services,                   that it was not desirable                    or
feasible      to construct             postal      facilities          for Government            owner-
ship under the Public                  Buildings         Act of 1959, as amended.
 (40 U.S.C.         601-615).          The Administrator               of General          Services
delegated        to the Postmaster               General         the authority           to construct
postal     facilities          for Government               ownership         but required         that        /
the facilities           be constructed              to the design             and construction               1
standards        of the General             Services         Administration.                                ,’

        The Department   followed                   the general      policy          of formally          ad-
vertising    for proposals     for                lease-construction                contracts.           The
                                            .




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contracts      awarded for the lease of small and medium size post
office    buildings    specified the annual   lease costs and usually
provided     for the lease of the buildings      for periods   ranging
from 10 to 20 years and for renewal         of the leases    at the option
of the Department.

         The Department          generally        leased     small and medium size post
office     buildings        without       evaluating       whether     it would be more
economical        to construct          the buildings.           The Department         stated      1
that,     although       it was desirable            to compare the cost of leasing                 1
post office         buildings       with the cost of constructing                   the build-      1
ings before         reaching      an investment          decision,       the requirement
that such buildings              be constructed          to General        Services     Admin-
istrationDs         design     and construction            standards       and the nonavail-
ability       of construction           funds made it impracticable                 to do so.
The Department           stated     also that the lessors’               cost of construct-
ing the leased buildings                  was less than the Government’s                  con-
struction        cost would have been because of the requirement                             that
the buildings          be constructed           to the higher        standards        of the
General       Services      Administration.

        As previously      indicated,     the Department,       at the time of
leasing     the small and medium size post office               buildings,      had not
made estimates        of what the Government’s            cost of constructing        the
buildings      to General     Services    Administration’s       standards      would
be.     Therefore     data was not available           that would have permitted
us to determine        whether     it might have been economically             advan-
tageous     for the Department         to have constructed       rather    than lease
the buildings.

        The Postal       Reorganization           Act, Public      Law 91-375,       approved
August 12 9 1970 (84 Stat.                719), recodified         title    39, United
States      Code p and created          the United       States    Postal    Service     as an
independent       establishment           in the executive         branch of the Govern-
ment m The act provides               the Postal       Service     with broad real estate
acquisition       authority      (39 U.S.C.          401, 410(a))        and borrowing      au-
thority      (39 U.S.C.      2005).         Since,    under this broad real estate               ac-
quisition      authority,      facilities          constructed       by the Postal       Service
need not conform          to General         Services     Administration’s         design    and
construction       standards,        it appears to us that the cost of

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constructing     a postal  facility       to the Department’s    specifica-
tions    should be about the same, irrespective           of whether     the
service     or a private  party     contracts   for its construction.

        In our opinion,            the Postal       Service     should base a deci-
sion as to whether             to construct         or lease a postal         facility        on
a comparison         of the costs that would be incurred                    under both
alternatives.           The comparative           costs could be determined                under
two methods : the accumulated                   interest       method prescribed           in
Bureau of the Budget Circular                   No. A-76, Revised,          dated Au-
gust 30, 1967, and the present                    value method.         Under the first
method ) the total            annual costs to lease a facility                  are com-
pared with       the cost of owning the facility                    for the period           of
the lease;       that is, the total             of the investment          costs,      the an-
nual imputed         interest        on the unamortized          investment       costs,      and
the annual operating               expenses,      less the balance         of the unamor-
tized     investment        (residual      value)      in the facility.           Under the
second method,          the present        value of the annual payments                  for the
lease of a facility              is compared with the present               value of the
cost of owning the facility                  for the period         of the lease;          that is,
the investment          costs and the present               value of the annual operat-
ing expenses 9 less the present                   value of the unamortized               invest-
ment costs        (residual        value)    in the facility.

        The desirability          of making comparisons           of the cost of leas-
ing or owning a facility             is illustrated         in the case of the De-
partment’s        lease of a postal        facility      for a lo-year       period   for
$182,260;       the Department       estimated       that the lessor        had con-
structed      the building        at a cost of $162,919.            The following
tables,     based on the assumption              that the Department’s          cost of
constructing         the facility      would have been the same as the les-
sor’s    cost,      show that,     under both computation           methods,      it would
have been more economical,              at certain       interest    rates,     for the
Department        to have constructed         the facility,




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                          Accumulated      Interest   Method

                                           Leasing     Ownership
                                            costs        costs       Difference

At   5 percent        interest    rate:
      Lease payments                      $182,260     $       -
      Land cost                                              7,500
      Building        cost                                 162,919
      Imputed       interest                                76,045
      Residual        value
          (building        and land)            -      -129,689
      Operating         expenses                          43,930

            Total                         $182,260     $160,705         $21,555

At 6 percent        interest    rate:
    Lease payments                        $182,260
    Land cost
    Building        cost
    Imputed       interest
    Residual        value
        (building        and land)              -      -129,689
    Operating         expenses                            43,930

            Total                         $182,260                      $ 6,346

At   8 percent        interest    rate:
      Lease payments                      $182,260     $       -
      Land cost                                              7,500
      Building        cost                                 162,919
      Imputed       interest                               121,672
      Residual        value
          (building        and land)            -      -129,689
      Operating         expenses                          43,930

            Total                         $182,260
                                           -_Ecz                      -$24,072
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       As indicated   in the above table,    at interest    rates  up to
about 6,s percent,      it would be more economical      to own the fa-
cility   and at higher     interest rates, it would be more economi-
cal to lease the facility.                I




                                      Present             Value   Method

                                              Leasing         COSlS           Ownership        costs
                                                              Present                         Present
                                              Total            value              Total        value
                                                                                               --            Difference
                                                                                                             ---
 A% S percent   discount      rate:
     Lease payments                      $182,260             $143,196        z           -   $       -
     Land COSL                                                                      1,500            7,500
     Building   case                                  -                           162,919         162,919
     Opera%ing    expenses                                                         43,930          34,514
     Residual   value    (build-
         ing and land)                        --                                  129,689         -78,742

                                                                                                                %rL,&E

 A% 6 percent  discolane      ra%e:
     Lease paynewts                      $182,240             $136,510        $        -      $        -
     Land cost                                                                       7,500           7,500
     Building  cost                                                 -             162,919         162,913
     Opera%hng expenses                               -                            53,930          32.975
     Residual  value     (build-
        ing and land)                         --                                  129,689         -71,280

            Total                        $-..         T --.= $J&$&!J$         $-       -
                                                                                      A-a     9 g&glJ~:

 A$. 8 percent  discount      rate:
      Lease payments                     $182,260             $125,184        $        -      $        -
      Land cost                                .                                    7,500           7 ,soc
      Building  cost                           -                    -             162,419         162,919
      Operating   expenses                                                         43,930          3r3,173
      Residual  value    (build-
         ing and land)                                                            129,689-        -58,428
                                                                          .
            Total                        $--.  -
                                          --.zxzm---          sJ&sd,fyl       sm- -2-i_       %J~jL.&f$

       The above table   shows that,   at a discount       rate of
 5 percent p it would be more economical        to own the facility
which may have many years of useful        life    beyond the lease
period 0 At a discount     rate approaching       7 percent,    however,
the lease of the facility      would be more economical.
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       The Department    awarded a contract         to an information          sys-
tems company for a study of the methodology                 for choosing       be-
tween lease and buy alternatives          in the acquisition            of postal
space e In October      1970, the Department          received      the company’s
report    which pointed   out the multiplicity           of factors       that
should be considered      in lease/buy      decisions       and which con-
cluded that every situation         should be examined          individually        on
the basis of economic       analyses.     The Department          is currently
evaluating     the study report.

       We believe      that,     in view of the large number                of small and;
medium size post office             buildings  that are leased              annually,
the Postal     Service       should base its decisions       as to           whether   to 1
construct    or lease the buildings           on comparisons    of           the costs      i/
that would be incurred             under both alternatives.                               i

        The Department        officials         told us that,         if the Department
was not required          to construct          postal     facilities      to General
Services     Administrationvs             design    and construction          standards,
a decision     as to whether            to construct         or lease a facility
would be based on the evaluations                     made as suggested          herein.
Because the Postal          Reorganization             Act vests      the Postal      Service
with broad real property                acquisition        authority     it is now prac-
ticable    for the Postal           Service       to make these evaluations.                We
believe    that decisions          made on that basis will               result     in a bet-
ter managed facility           acquisition          program.

       We plan to make no further      distribution    of this report
unless   copies   are specifically   requested,     and then we shall
make distribution     only after   your agreement     has been obtained




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or public      announcement   has been made by you concerning   the   con-
tents   of   this report.

                                     Sincerely      yours9




                                     Comptroller   General
                                     of the United   States

The Honorable     Joseph M. Montoya,     Chairman
Subcommittee     on Treasury,
  Post Office,     and Executive  Office
Committee     on Appropriations
United   States   Senate