Sale and Leaseback of Detention Facilities

Report No. 99-07
March 1, 1999
Office of the Inspector General


The purpose of this audit was to determine the propriety of prospective rental charges by private prison contractors to the federal government for the detention of federal prisoners. This issue is a new concern because the two largest private prison contractors in the United States have begun selling some of their facilities to Real Estate Investment Trusts and subsequently leasing the facilities back from the new owners. Under this condition, the rent paid by the private prison contractors for the use of the facilities is significantly higher than the ownership costs incurred by the private prison contractors in the past. The cost of detaining federal prisoners will increase substantially if the private prison contractors are allowed to pass on their entire rental expenses to the federal government. To address this issue, we requested and obtained a legal opinion from the General Counsel, Office of the Inspector General.

Based on the attached General Counsel's legal opinion, we determined that rental costs under a sale and leaseback arrangement are allowable only up to the amount the contractor would be allowed had the contractor retained title to the property. Furthermore, in our judgment, the results of this audit are applicable to all current and future contracts and Intergovernmental Service Agreements (IGSA) involving a facility that was sold and then leased back to the previous owner.