Leasing defense articles

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1. Lease rather than sell

Section 61 of the Arms Export Control Act lets the President lease defense articles from Defense Department stocks to an eligible foreign country or international organization (22 U.S.C. 2796(a)). Four conditions must be met first. The President must find compelling foreign policy and national security reasons for a lease rather than a sale. The President must also find that the articles are not needed for public use for the time being.

The third condition looks at American industry. The President must first consider the effect of the lease on the national technology and industrial base (22 U.S.C. 2796(a)(3)). That includes how far the lease reduces the chance for companies in that base to sell new equipment to the country receiving the leased articles. The fourth condition is that the lessee agrees to pay, in dollars, all costs the government incurs in leasing the articles (22 U.S.C. 2796(a)(4)).

2. What the lessee pays

The statute lists the costs (22 U.S.C. 2796(a)(4)). They include reimbursement for depreciation while the articles are leased, and the cost of restoration or replacement if the articles are damaged. If the articles are lost or destroyed and the United States intends to replace them, the lessee pays the replacement cost less depreciation. If there is no intent to replace, it pays at least the actual value, less depreciation, stated in the lease agreement.

The Financial Management Regulation turns this into a price. "The amount to be charged for the lease of defense articles is the depreciation incurred during the period of the lease" (FMR Vol. 15, Ch. 7, para. 17.1.1). The depreciation charge depends on seven inputs (FMR Vol. 15, Ch. 7, para. 17.1.2). They are the lease date, the date the item was first fielded or acquired, its total estimated service life and the length of the lease. The item’s original acquisition cost, a pro rata share of nonrecurring research, development and production costs, and any capital improvements also count.

Support costs are priced separately. Inspection, restoration, maintenance, accessorial and other support costs tied to the lease are priced under the pricing chapter and put on a separate Letter of Offer and Acceptance (LOA) (FMR Vol. 15, Ch. 7, para. 17.0). Replacement costs are estimated when the item goes on lease and written into the lease agreement (FMR Vol. 15, Ch. 7, para. 17.2). If a leased article is damaged beyond repair or not returned, the replacement cost is collected from the lessee. The administrative surcharge does not apply to lease rental payments.

3. When the lessee pays less

The cost requirement does not apply to leases for cooperative research or development, military exercises, or communications or electronics interface projects (22 U.S.C. 2796(a)). The President may waive reimbursement of depreciation on any article that has passed three-quarters of its normal service life, if doing so is important to the national security interest. The regulation records that this waiver authority has been delegated to the Director of the Defense Security Cooperation Agency, or to the Deputy Director in the Director’s absence (FMR Vol. 15, Ch. 7, para. 17.0).

A further waiver covers reciprocal leases, where the lessee in turn leases defense articles to the Defense Department on substantially reciprocal terms (22 U.S.C. 2796(a)). It may be used only after a detailed notification of each lease to the House Foreign Affairs and Appropriations Committees and the Senate Foreign Relations and Appropriations Committees. The statute also limits its use to the current fiscal year and to one country, unless Congress provides otherwise. It adds that the provision does not authorize appropriations for payments by the United States for leased articles.

4. How long a lease lasts

Every lease has a fixed term (22 U.S.C. 2796(b)(1)). It may not exceed five years, plus any specified period needed to complete major refurbishment of the articles before delivery. The statute defines major refurbishment work as work with a period of performance of 6 months or more (22 U.S.C. 2796(b)(2)). Each lease must also provide that the President may end it at any time and require the immediate return of the articles (22 U.S.C. 2796(b)(1)).

5. Only these authorities

Articles in Defense Department stocks may be leased or loaned to a foreign country or international organization only under this subchapter, or under the military assistance chapter of the Foreign Assistance Act (22 U.S.C. 2796(c)). They may not be leased to foreign recipients under the general leasing authority in section 2667 of title 10. Any law restricting the countries or organizations to which sales may be made is treated as covering leases too (22 U.S.C. 2796c).

6. Certification to Congress

Before entering into or renewing a lease, or a loan under the Foreign Assistance Act, for one year or longer, the President sends a written certification to Congress (22 U.S.C. 2796a(a)). Its recipients are the Speaker and the House Foreign Affairs Committee, together with the chairmen of the Senate Foreign Relations and Armed Services Committees. It names the recipient, the type, quantity and replacement value of the articles, and the terms and duration. It also justifies the lease, including why the articles are being leased rather than sold.

Timing depends on the recipient (22 U.S.C. 2796a(c)). The certification is due at least 15 calendar days before signature or renewal for NATO, its members, Australia, Japan, the Republic of Korea, Israel and New Zealand. For any other country or organization it is due at least 30 calendar days before. The President may waive these requirements by stating in the certification that an emergency requires the lease immediately in the national security interest, with a detailed justification (22 U.S.C. 2796a(b)).

Larger leases can be blocked. For leases or loans of a year or more, Congress may prohibit the agreement by enacting a joint resolution within that 15-day or 30-day period (22 U.S.C. 2796b(a)(1)). This applies where major defense equipment is valued at $14,000,000 or more, or defense articles at $50,000,000 or more, in each case at replacement cost less depreciation. For the NATO and allied group named above, the thresholds are $25,000,000 and $100,000,000 (22 U.S.C. 2796b(a)(2)).

7. Closing a lease

Leases are administered by the implementing agency (IA) logistically responsible for the articles (SAMM C16.3.19). "A lease cannot be closed until the equipment is returned, all related costs are recovered under FMS procedures (such as costs for restoration), and the lease rental payments are paid in full" (SAMM C16.3.19). Closure procedures begin at least two quarters before the lease expires or ends (SAMM C16.3.19.1.1). When the articles come back, the IA records the actual return dates and notifies the Defense Finance and Accounting Service, which reconciles the account and closes the lease once all payments are collected (SAMM C16.3.19.1.2).

Key terms

Lease	A transfer of defense articles from Department stocks for a fixed term, with the articles returned at the end.
Depreciation charge	The lease price: the depreciation incurred on the article during the lease.
Replacement cost	The amount, estimated at the start of the lease, collected if an article is destroyed or not returned.
Major refurbishment work	Work with a period of performance of 6 months or more, which may extend a lease beyond five years.
Joint resolution of disapproval	The means by which Congress may block larger leases within the notice period.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

How Sentfore supports this

Leased equipment still has to be moved, secured and supported while it is in use. Sentfore works at the delivery end of defense programs in difficult environments, providing secure movement, protective security, facilities and life support. Requirements can be sent through the contact page.