Sunday, April 10, 2011

Lease of real property as a viable public-private partnership scheme for local government units (LGUs)

As previously discussed (please see, local government units (LGUs) have the power to engage in and enter into public-private partnership schemes, one of which is the contract of lease for real properties, pursuant to the Local Government Code of 1991.

In this regard, one of the most essential aspects, if not the most essential aspect, of leasing an LGU-owned real property is the determination of the rental rates. This is where possible violations of the Anti-Graft and Corrupt Practices Act (RA 3019) and related laws may arise. To prevent such possible missteps and avoid any suspicion of wrong-doing, LGUs must observe the proper Commission on Audit (COA) rules.

As early as 1988, the COA has come up with the pertinent guidelines addressing that concern, as it adopted the guidelines formulated by the Department of Public Works and Highways (DPWH), which was, in turn, made pursuant to Executive Order No. 301, issued by President Cory Aquino.

According to said guidelines, 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 its capital or investment in the construction and maintenance of the building/space.

To determine the reasonable rental rate, the COA has espoused the 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 buildings for rent is determined by comparative rentals of space in the vicinity of the same building condition and/or classification. More often this method is used to check the computed rental rate.

Additional pointers in determining the factor value are:


To my knowledge, such guidelines have not yet been repealed or modified. It is safe to say then that these guidelines remain valid and effective.


Secretary Jesse Robredo of the Department of Interior and Local Government (DILG) issued Memorandum Circular No. 2011-16 on 31 January 2011, enjoining all local chief executives "to create a Public-Private Partnership (PPP) Sub-Committee in the Local Development Councils to assist the LGUs in setting the economic and social development and coordinate the development efforts as provided for in Section 106 of the Local Government Code of 1991. Specifically, the PPP Sub-Committee shall, among others, assist the LDC in the formulation of action plans and strategies related to the implementation of PPP programs and projects per EO No. 8 s. 2010," in order to localize the mandated powers and functions of the recently established PPP center.

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