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

As previously discussed (please see http://subiclawyer.blogspot.com/2011/01/public-private-partnership-schemes-for.html), 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:

I LOCATION AND SITE CONDITION
II NEIGHBORHOOD DATA
III BUILDING
IV FREE SERVICE & FACILITIES
V RENTAL RATE FACTOR VALUE
VI OTHER INFORMATION AND RECOMMENDATION

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.

Postscript:

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.

Creative and innovative ways of developing and managing your real estate portfolio

Real estate owners and developers in the Philippines may take a look at and consider co-development agreements as an efficient and creative way of developing and managing their land bank, even as such agreements also point to inexhaustible sources of funds (both local and foreign), and without risking the potential loss of the property from their hands. Funding, operation and control of businesses may be amply addressed by this kind of arrangement. Excerpts:

MEMORANDUM OF AGREEMENT

FOR CO-DEVELOPMENT

KNOW ALL MEN BY THESE PRESENTS:

This Memorandum of Agreement for Co-Development made and entered into by and between: 

__________________________ (hereinafter referred to as “____________”), a corporation duly organized and existing under and by virtue of the laws of the Republic of Philippines, with principal place of business located at _______________________, Philippines, represented herein by its President __________________, of legal age, Filipino citizen, married;   

- and -

__________________________ (hereinafter referred to as “____________”), of legal age, ________________ citizen, ________________ , with business address at _________________________________________________________;

WITNESSETH, That:

           

Whereas, _________________, by virtue of the Lease Agreement (“Lease”) it entered into with ___________________ (“___________”), has leasehold rights over a _________-hectare parcel of land located at ___________________________, said property identified  under the Lease and is known as ______________________;

            Whereas, ____________ is obliged to develop the _____________ pursuant to its commitment under the Lease;

            Whereas, _________________________ having the necessary capability and the required funds, offered to develop and/or finance the development of a portion of _________________, which offer ___________has accepted;

            NOW THEREFORE, for and in consideration of the covenants and stipulations, terms and conditions herein contained, the parties have agreed as follows:

1.      ________________________ , for a minimum budget of Five Million Pesos (Php5,000,000.00), shall cause the development and finance the construction of _______________, fully furnished, complete with landscaping, pathways, private fences, water system (septic tanks and other applicable accessories), electrical facilities, which will have a separate entrance to ___________ area (hereinafter referred to as the “Project.”) The specifications are as follows:

 xxx

The units and related facilities and amenities shall be built in accordance with the drawings, plans and specifications submitted by ____________________ to _________ which shall approve the same and have the right of inspection and visitation anytime during the construction.

2.      ___________ shall allow _______________________  to take actual physical possession of a _____________-square meter (_____-sq.m.) portion of _______________, solely for purposes of construction. The sketch map of its location within _____________ shall be provided by ____________.

3.      ____________________ shall construct those enumerated in par. 2, i.e., the Project, in accordance with the terms and conditions set forth under the Lease, and with the laws, ordinances, rules and regulations of the City pertinent to building of structures.

4.      ________________, at __________________ ‘s expense, shall secure all the necessary clearances, approval and/or permits from the City, the power, water and telecommunication supplies from _________________________, respectively.

  

5. ____________________ binds itself to finish the construction within _____ days, counted from the date of signing of this Agreement, xxx

Public-private partnership schemes for local governments

In a recent interview, Philippine President PNoy said, “There is a need to fast-track the implementation of the Public-Private Partnership programs and projects as a cornerstone strategy of the national development to accelerate the infrastructure development of the country and sustain economic growth.”

This could not be truer in the local government front where lack of funds is a perennial concern, and is the usual excuse for below par delivery of basic services to the local government units’ (LGUs) constituents.

While the Local Government Code of 1991 has granted them so much autonomy, the LGUs have yet to maximize their full potentials as the backbone of the nation. LGUs rely basically on their internal revenue allotment (IRA) shares, collection of real property taxes, business permit fees, building permit charges, and some other minor, miscellaneous sources of revenues, e.g., market rents, boat and bicycle registrations, occupational permit fees. Lucky are those LGUs friendly with their congressmen for they will have a share of the pork barrel.

With an ever burgeoning population and increasing cost of delivering basic services on health, education, environment and sanitation, and infrastructure development, LGUs are hard put to make both ends meet. Salaries and wages of employees and workers alone already make up 40% of their annual budget.

Yet, the Local Government Code itself offers the solution: partnering with the private sector. Under Section 18, it provides that LGUs have the power to generate and apply their own resources. Among others, they have the power to create their own sources of revenue and to levy taxes, fees, and charges which shall accrue exclusively for their use and disposition; and to develop, lease, encumber, alienate, or otherwise dispose of real or personal property held by them in their proprietary capacity and to apply their resources and assets for productive, developmental, or welfare purposes.

Such unprecedented grant of power to LGUs by law remains untapped. Harnessing the opportunities offered by Section 18 is vast.

To name a few, roads, ports, markets, beaches, terminals, slaughterhouses, garbage collection, as well as all the idle lands of LGUs belonging to them in their proprietary functions, maybe subject of public-private partnerships or PPPs.

There are various modes of accomplishing such partnership.

The Amended Built-Operate-Transfer (BOT) Law gives several variations/schemes. Focusing primarily on infrastructure projects, the BOT Primer on Republic Act No. 7718 shows the following:     

Build-Operate-and-Transfer (BOT)

Build-and-Transfer (BT)

Build-Own-and-Operate (BOO)

Build-Lease-and-Transfer (BLT)

Build-Transfer-and-Operate (BTO)

Contract-Add-and-Operate (CAO)

Develop-Operate-and-Transfer (DOT)

Rehabilitate-Own-and-Transfer (ROT)

Rehabilitate-Own-and-Operate (ROO)

Other variations as may be approved by the President

In BOT projects, ownership of the subject property stays with the LGUs.

On the other hand, LGUs may also consider a joint venture scheme. In an opinion, the Department of Interior and Local Government (DILG) affirms the power of LGUs to enter into a joint venture agreement with the private sector pursuant to its corporate powers.

The National Economic Development Authority (NEDA) defines joint venture as, “A contractual arrangement whereby a private sector entity or a group of private sector entities on one hand, and a Government Entity or a group of Government Entities on the other hand, contribute money/capital, services, assets (including equipment, land or intellectual property), or a combination of any or all of the foregoing. Parties to a JV share risks to jointly undertake an investment activity in order to accomplish a specific, limited or special goal or purpose with the end view of facilitating private sector initiative in a particular industry or sector, and eventually transferring ownership of the investment activity to the private sector under competitive market conditions. It involves a community or pooling of interests in the performance of the service, function, business or activity, with each party having a right to direct and govern the policy in connection therewith, and with a view of sharing both profits and losses, subject to agreement by the parties. A JV may be a contractual JV, or a corporate JV.”

JV Agreements must be distinguished with BOT schemes as the former allows the private sector to take over the undertaking of a project in its entirety after the government divests itself of any interest in the JV.

Similar in the sense that ownership of the property stays with the LGUs, lease schemes may also be considered. Pursuant to their corporate powers and subject to applicable Commission on Audit (COA) circulars, LGUs can enter into lease agreements with the private sector. Generally, in a contract of lease, there is a subject matter, the use of a property of the LGUs; a cause or consideration which is the amount of rental that shall be paid by the lessee; and consent among the parties.

In a case, the Supreme Court upheld the Ombudsman’s findings that the mere provision in the contract that the building shall belong to the city government at the termination of the contract will not be sufficient to classify the transaction under the BOT scheme. This kind of provision is ordinary in long-term lease agreement.

In all instances, the modes of selecting a partner and awarding a contract are either through public bidding or unsolicited proposal, with the latter always subject to a challenge.

A common noble vision, strong political will and harmonious relations can help the LGUs become self-reliant, progressive and confident. In these instances, political and personal differences ought to be set aside. At stake is the future of their towns, cities, provinces, at the backdrop of globalization and international competitiveness. 

Indeed, with the initiative already coming from Malacanang through Executive Order No. 8, and the requisite synergy and cooperation between the local chief executive and the local sanggunian (legislature), including the civil society, the LGUs would be in a proper position to maximize their full potentials as a vital partner in nation-building.