renewal options. Further--as has been pointed out in our prior reports--the Department, in planning for new facilities should--on an individual basis--give consideration to Government ownership. Where this is not feasible, consideration should be given to longer lease terms.

Leases having a 10-year basic term tend to be more costly to the Government than leases having a longer term. Our review of eight projects in which the original bids were rejected because they were considered to be too high disclosed that lower annual leasing costs were obtained when bids were requested for longer basic lease periods. Examples of savings noted are:

The $1,400 shown for Post Office C represents annual savings for years 1-10; for years 10-15 the rental was even lower resulting in annual savings of $4,900 in those years.

We estimated that the savings over the basic lease terms of these four leases will be about $266,000. In addition, should any of the renewal options be exercised the savings will be greater. Department officials admit that leasing costs for basic periods of 10 years generally are higher than for longer basic periods because investors are assured of recovering a greater portion of their investments from the Government under longer term leases and thus can minimize the risks involved.

Analysis of lease renewal options

Department procedures require that all lease agreements

of 10 years or more contain at least four 5-year renewal options and that these options be obtained at a lower rental rate than the basic lease term. The Department's procedures are based on the supposition that the lessor has recovered a large portion of his investment during the basic term.

Department procedures also require that where the bid received does not contain lower rental rates for the options, negotiations be conducted and the results documented.

Our examination of renewal options obtained on 84 projects contracted for in fiscal years 1966 and 1967 disclosed that in most instances significant reductions for the option period were not obtained; and often attempts were not made to negotiate a lower rental. Postal officials stated that lower rental rates for the option periods are difficult to obtain and consequently attempts to do so are usually futile. The officials contended that lessors considered such reductions unreasonable in view of the rising market value of the rental space and the fact that as a postal building gets older it requires a greater amount of maintenance and repairs.

Our analysis of 25 projects where the option rentals were negotiated did not support this contention. For 23 of the 25 projects, option rental reductions were obtained. For example, for one facility reviewed, the rental costs for the 4-5 year options were reduced from $358,920 to $330,000 through negotiations--a reduction of $28,920; in addition, the basic lease term was renegotiated at the same time which reduced the annual rental costs from $17,946 to $16,800, or a reduction of $11,460 over the basic term.

Evaluation of rental bids

Department procedures required that for all advertised lease-construction projects an estimate of annual rental and data on comparable rental facilities be developed prior to the opening of bids. The estimates and comparability data are--according to Department procedures--to be used to analyze bids received from prospective lessors.

We found that the estimates of annual rental could not be relied upon as an independent means of evaluating the reasonableness of bids. In this regard, there were numerous instances where regional offices had evaluated and accepted low rental bids on the basis of real estate officers' estimates of fair rental rates that either contained mathematical errors in computations or had not been computed in accordance with the Department's prescribed procedures. Details on these matters follow.

In accordance with Department procedures, a regional real estate officer, stationed in the geographical area of a proposed post office, prepared an estimate of the fair rental value of the facilities. The real estate officer also developed data on the rental value of comparable existing buildings in the community. The estimates and comparable rentals were intended to be used by the real estate officer to analyze bids after which they were forwarded to the regional office--along with the officer's recommendations on the bids-for review and possible award of a lease-construction contract.

In developing the rental estimate, the real estate officer initially prepared an estimate of the construction costs

for the proposed facility. This estimate served as a basis for developing the rental estimates. In arriving at the fair rental value of the planned facility several factors were considered such as amortization of the lessor's investment (cost of construction), annual maintenance costs, certain utility services, taxes, and insurance.

The estimates prepared by real estate officers in the field did not provide regional officials with reasonable assurance that the estimates were reliable. Our examination of 106 estimates prepared by three regional offices visited disclosed that 56 of the estimates contained mathematical errors. The errors noted ranged from a few dollars to several thousand and appeared to result from carelessness. Our analysis at one regional office disclosed that rental estimates generally were not examined closely by regional officials except in cases where the low bid exceeded the estimated fair rental rates. We also found that Department procedures required that estimated lessor construction costs be amortized at a rate of 6 percent over a 30-year period. Of 106 lease-construction projects contracted for in fiscal years 1966 and 1967 in three postal regions, the 6-percent rate was used for all projects. The amortization periods, however, ranged from 17 years to 35 years as shown in the following schedule.

A reduction in the amortization period can result in a significant increase in estimated annual rental. The following schedule of selected facilities demonstrates the significance of using an amortization period other than the standard 30-year period.

The postal regions usually followed the practice of awarding lease contracts when the low bid was less than or did not exceed the postal estimate by more than 10 percent. Accordingly, the lessors' bids for the facilities in the above schedule presumably could have been rejected and/or negotiated downward had the 30-year amortization period been used. The Department's procedures did not provide assurance that the estimates were in all cases prepared in advance of bid opening and/or were not adjusted after the bids were opened.