COMMISSION ON AUDIT CIRCULAR NO. 88-282A

TO : All Heads of Departments, Chiefs of Bureaus, Agencies and Offices of the National Government; Managing Heads of Government-Owned and/or Controlled Corporations, Board and Commissions; Chief Accountants/Corporate Treasurers; All COA Auditors and Others Concerned.

SUBJECT: Uniform Standards/Guidelines to Determine the Reasonableness of the Terms and Rental Rates of Lease Contracts for Private or Government Buildings/Spaces.

Supplementary to COA Circular No 87-282, dated December 22, 1987, decentralizing action on government negotiated contracts, Lease Contracts, and records disposal, quoted hereunder is the full text of the Uniform Standards/Guidelines to Determine the Reasonableness of the Terms and Rental Rates of Lease Contracts for Private or Government Buildings/Spaces which was issued by the Department of Public Works and Highways in pursuance of the provisions of Section 6, Executive Order No. 301, dated July 26, 1987:

"Republic of the PhilippinesDEPARTMENT OF PUBLIC WORKS AND HIGHWAYS

OFFICE OF THE SECRETARYBonifacio Drive, Port Area, Manila

UNIFORM STANDARDS/GUIDELINES TO DETERMINE THE REASONABLENESS OF THE TERMS AND RENTAL RATES OF LEASE CONTRACTS FOR PRIVATE OR GOVERNMENT BUILDINGS/SPACES

Pursuant to Section 6 of Executive Order No. 301, dated 26 July 1987, the following uniform standards/guidelines are hereby formulated:

1. PARTIES TO THE CONTRACT

1.1 LESSOR. - The lessor is the absolute owner of the building/place to be leased. The lessor may be a private individual, a corporation, or government agency. If a private individual, he may personally enter into contract or authorize somebody, thru a special power of attorney, to represent him. If a corporation, the representative should be duly authorized by a resolution of the governing board. If a government agency, it shall be represented by the official having custody and administration of the building/space, who is duly authorized by law to enter into this contract, and the lease contract shall be subject to approval by the official concerned.

1.2 LESSEE. - The lessee is the party who rents the building/space. The lessee may be a private individual, a corporation or a government agency. If a private individual, he may personally enter into a contract or authorize somebody, thru a special power of attorney, to represent him. If a corporation, the representative should be duly authorized by

a resolution of the governing board. If a government agency, the head of the agency shall be represented by the official having control of the appropriation against which the contract shall create a charge, and the contract shall be subject to approval by the head of the agency concerned.

2. TERMS AND CONDITIONS

The contract of lease shall be embodied in a public instrument and shall integrate all the covenants, understanding and agreements of the LESSOR and LESSEE. Such terms and conditions shall include, but not limited to, the following:

2.1 Duration of the Lease

As a general rule, the duration of the lease shall not exceed one (1) year and, as far as practicable, shall not go beyond the end of any given calendar year.

2.2 Rights and Obligation of Both Parties

The rights and obligations of both parties shall be clearly defined to preclude ambiguity and shall be fair and equitable to both parties. Such rights and obligations shall include:

2.2.1 Obligations of the Lessor

a. To undertake major repairs including damages due to fortuitous events during the effectivity of the lease and to complete such repairs within a specified time frame.

b. To provide and make available, whenever called for or as may be agreed upon in the contract, such facilities like air-conditioning units and telephone system, and maintain these facilities in operating condition during the lease period.

c. To maintain the premises of the building/space in good and tenantable condition during the term of the lease.

2.2.2 Obligation of the Lessee

a. To pay promptly and regularly the rentals agreed upon in a manner specified in the contract.

b. To pay the monthly billings for facilities like electric, water and telephone during the period of lease.

c. To surrender the building/space upon expiration of the lease contract and to shoulder damages which the LESSOR may suffer for his failure to surrender the same.

d. To faithfully comply with the terms and conditions of the agreement.

2.2.3 Rights of the Lessor

a. In the event the building/space is deserted by the LESSEE before the expiration of the lease without justifiable cause, the LESSOR shall have the right to enter the relet the same and receive the rentals corresponding to the unexpired period of the lease.

b. To terminate the lease contract and eject the LESSEE for failure or refusal of the latter to pay the rentals agreed upon during the period stipulated in the lease contract or for violation of contract conditions by the LESSEE.

2.2.4 Rights of the Lessee

a. To withhold payment of rentals in the event the LESSOR fails to make the necessary repairs of damaged facilities or damage to any portion of the building which is its obligation to repair under the agreement within a reasonable time and to undertake such repairs applying the rentals due to cover the cost thereof.

b. To occupy and use exclusively the building/space leased to the exclusion of the owner or his relatives.

c. To introduce improvements in the building/space, subject to prior consent of the LESSOR under such terns and conditions as may be agreed upon.

3. TERMINATION OF THE CONTRACT

Except for causes expressly stipulated in the contract, neither party shall have the authority to unilaterally terminate the contract. Termination not due to causes provided in the contract shall be mutually agreed upon.

4. REASONABLENESS OF RENTAL RATES

4.1 As a general rule, rental rates are considered reasonable when they represent or approximate the value of what the LESSEE gets in terms of accommodation, facility and convenience from the leased building/space, and the LESSOR gets equitable return of his capital or investment in the construction and maintenance of the building/space.

4.2 Subject to certain modifications as may be necessary from time to time, the Department of Public Works and Highways hereby adopts the BSRPMO Guidelines in Determining the Reasonable Rental Rates, copy attached, for application to both Private and government building/spaces for purposes of Section 6 of Executive Order No. 301.

Issued this 3rd day of March 1988 at Manila, Philippines.

(SGD.) J. NERY FERRERSecretary"

All concerned should be guided accordingly.

(SGD.) EUFEMIO C. DOMINGO, Chairman

BUILDING SERVICES AND REAL PROPERTYMANAGEMENT OFFICE

1985

GUIDELINES IN DETERMINING THE REASONABLE RENTAL RATES OF PRIVATELY-OWNED BUILDING/SPACES RENTED BY NATIONAL GOVERNMENT OFFICES

Rentals of privately owned building varies and most often is treated on a Case to Case basis. However for purposes of illustration hereunder is one of the approaches being used by the Building Services and Real Property Management Office in an Outline form.

DEFINITION

UNIT CONSTRUCTION COST - the estimated prevailing and/or current cost of construction per square meter of comparable building being appraised.

Type of Building Construction

1. Mixed Materials (Wooden Frame Buildings.)2. Brick Encased of Other Encased Buildings.3. Building of Solid Construction4. Building of Reinforced Concrete & Steel Frame Work5. Condominium

DEPRECIATION - Value loss due to physical deterioration (water & tear) and Obsolescence.

Common type of determining depreciation:

1. Straight Line Depreciation2. Observed Depreciation

REPRODUCTION COST - the estimated total cost of replacing the building new same utility. (Sometimes called "Replacement Cost".)

CAPITALIZATION RATE - the anticipated rate of return. The two (2) elements involved are: 1) Interest on the cost or value of the property, and 2) Recovery or Recapture of the Capital or principal invested in the (wasting asset) property.

FACTOR VALUE - the rating factor where locations and site conditions, neighborhood data and building structural condition, functionality, facilities and other requirements, including free services and facilities offered by the LESSOR are considered.

RENTAL - amount paid by the National Government Agency (LESSEE) for the use and/or occupancy of the privately owned building lot to their LESSOR, where payment is usually on monthly basis.

MONTHLY RENTAL - Floor Area (Rentable) x Rate (per sq.m. per month.)

AREA - the total rentable area of the building in square meters being occupied by the LESSEE.

Rentable Area implies that area of floor spaces less common areas like lobby, stairwall, elevator hall, common comfort machine room for aircon and other area of common use by the public or upper floor occupants.

EXAMPLE

OFFICE BUILDING "A"

Estimated Unit Construction Cost = P1,900/sq.m.Depreciation (new Building = 0070

= 18%Capitalization Rate = 98%Factor ValueReproduction Cost = 1,900 x 1 = P1,900/sq.m.Formula Rate = 1,900 x .015 = 28.50/sq.m.Rental Rate = 28.50 x .98 = P27.93/sq.m.

say = P27.93/sq.m.Area Rentable = 200 sq.m.Monthly Rental = 200 x P27.90

NOTE:

Above computed rental rate applies to the regular floors, however, ground floor areas have higher rates it being a premier floor of a building.

OUR METHODS

A. INVESTMENT BUILDING APPROACH METHOD

Factors to be considered are:

1. Cost land (Market Value) - the lot where the building will be erected. This includes the open areas.

2. Cost of building and/or Equipment/money invested.3. Recovery period of the Principal/or Machineries and other improvements.4. Income derived from the rate of interest stabilize rate of the money invested in the

property being appraised.5. Administrative and /or General Operating Services Expenses.6. Real Estate Taxes.7. Others

Appraised value of building for rent are more often treated on a Case to Case Basis and at times depend on the building amenities and/or facilities provided free by the LESSOR.

ADVANTAGEOUS TO THE LESSEE IN TERM OF MONEY

Savings on the part of the government. To name some are the following:

1. Electrical consumption of the Aircon system2. Electrical consumption of lights (Office)3. Janitorial Services and Security of the building4. Partition the leased are based on the LESSEE’S specification and/or requirements5. Additional parking space6. Bigger actual floor space occupied compared to the area stipulated in the Contract

of Lease7. Executive comfort room other than the common toilet usually situated in the lobby8. Others beneficials to the tenant

Appraised value of buildings for rent is determine by comparative rentals of space in the vicinity of the same building condition and/or classification. More often this method is use to check the computed rental rate (above).

ATTACHMENT: POINTERS IN DETERMINING THE FACTOR VALUE.

I LOCATION AND SITE CONDITION II NEIGHBORHOOD DATAIII BUILDINGIV FREE SERVICE & FACILITIES V RENTAL RATE FACTOR VALUEVI OTHER INFORMATION AND RECOMMENDATION