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Improvements on Owned or Leasehold Property with Federal Funds

Classification of Improvements

Under the Uniform Guidance, improvements are classified as either rearrangement and reconversion costs or as capital expenditures.

Rearrangement and Reconversion Costs

2 CFR 200.462 Rearrangement and reconversion costs provides that costs incurred for ordinary and normal rearrangement and alternation of facilities are indirect costs. Special arrangements and alterations costs incurred specifically for a Federal award are allowable as a direct cost with the prior approval of the Federal Awarding agency or pass-through entity.

Requirements

All of the following requirements must be met for costs to be considered rearrangement and reconversion direct cost:

  1. The costs are incurred specifically for a Federal award, and
  2. The grant award requires alterations to the subrecipient’s facility such that award cannot be implemented without such modifications or alterations, and
  3. The Federal agency or pass through entity (State Agency) has provided prior approval for these costs, and
  4. The modifications are minimal, and do not significantly change or alter the existing facility, and
  5. The alterations follow all Cost Principles, such as reasonable, and necessary to project being funded, and
  6. The cost is $50,000 or less. This amount is based on the capitalization threshold for leasehold improvements in the Fiscal Procedures Manual Chapter 4, Section 2.4.1.

Some examples of modifications are:

  1. Adding a divider to create an additional office space
  2. Enhancing the sound-proof so that privacy may be maintained
  3. Cosmetic modifications

If an improvement is for ordinary and normal rearrangement and alteration of facilities the cost is under $50,000, and modifications do not meet the other requirements for a direct cost, then the costs are allowable as indirect costs.

If the facility or property requiring alteration is leased, the State agency should verify with the property owner that the lease allows such alterations, as well as options available to lessee. Often, minor alterations may be provided (usually at a lower cost) by the owner, with those costs prorated across the life of the lease. This easily allows the indirect costs to be accounted for in the subrecipient’s indirect costs associated with the award. If that is not an option, at a minimum, the property owner’s approval for such alterations must be obtained. Additionally, the State agency (lessee) should obtain clarity regarding the requirement for restoring the space to the same condition immediately prior to the alterations.

Rearrangements do not create a fiscal asset, therefore are not considered to be a Capital Expenditure.

Capital Expenditures Requirements

Improvements on Owned or Leasehold property are capitalized when all the following criteria are met:

  • Enhance the value or useful economic life of the leased asset.
  • Are more than just maintenance or repairs.
  • Are expected to be used for more than one year

Cost over $50,000

When utilizing federal funds for capital expenditures, it is important to first consider 2 CFR 200 Subpart E, Cost Principles prior to approving those expenditures. A full cost analysis should be undertaken. Cost reasonableness should be evaluated and justified with a clear rationale for utilizing federal funds for the specific project, especially if the improvements will be for a leasehold property.

All Federal Funded Expenditures

  • 2 CFR 200.311-316 provisions include the requirements for the use of federal funds for capital expenditures, including property, equipment, and supplies.
  • 2 CFR 200.311 provides that the title of the property title to real property acquired or improved under the Federal award will vest upon acquisition in the recipient or subrecipient. The property owner has ownership of the capital expenditure and must carry adequate insurance and agree to maintain the property for the use intended by the federal funds. When real property is no longer needed for the originally authorized purpose, the recipient or subrecipient must obtain disposition instructions from the Federal agency or pass-through entity. The instructions must specify one of the following disposition methods:
    • Retain the title and reimburse the federal entity in an amount equal to the percentage of cost of the property or improvement based upon fair market value;
    • Sell the property and reimburse the federal entity in the amount of the percentage of the federal interest in the property; or
    • Transfer title of the property to the federal entity or third party approved by the federal entity.
  • 2 CFR 200.312 applies only to federally owned property, generally surplus property.
  • 2 CFR 200.313 pertains to equipment purchased with federal funds with a value of over $10,000 per unit.
  • 2 CFR 200.314 provides the requirements for excess supplies over $10,000.
  • 2 CFR 200.315 details the use of intangible property and the rights therein.  
  • 2 CFR 200.316 provides that the Federal agency or pass-through entity may require the recipient or subrecipient to record liens or other appropriate notices of record to indicate that personal or real property has been acquired or improved with a Federal award and that use and disposition conditions apply to the property.
  • Real property, equipment, and supplies with a current fair market value of $10,000 or less (per unit) may be retained, sold, or otherwise disposed of with no further responsibility to the Federal agency or pass-through entity.

Federal Interest in the Property

As noted in 2 CFR 200.316, when the Federal Government provides funding for a substantial improvement in property, such as for a capital expenditure, the recipient/subrecipient is required to attach a lien to the property called a Notice of Federal Interest (NFI). In this situation:

  1. The recipient/subrecipient must notify and obtain agreement from the owner of the property of the Federal interest in the property.
  2. The owner of the property is required to file a Notice of Federal Interest (lien) on the property. This is a legal document that must be filed within the county jurisdiction where the property is located to protect the financial and public interests in the property. The NFI must reference the Federal Award Number , a complete description of the project, a legal description of the property, and contain the property owner’s signature and it must be notarized. A copy of the NFI should be provided to the state agency and maintained in the master file of record. (See attached example)
  3. This interest includes maintaining the property for the same (or like) purposes as the funding intended, and following all federal requirements for the useful life of the property.
  4. Per 2 CFR 200.330 The Federal agency or pass-through entity must require the recipient or subrecipient to submit reports on the status of real property in which the Federal Government retains an interest. Such reports must be submitted at least annually. In instances where the Federal Government’s interest in the real property extends for 15 years or more, the Federal agency or pass-through. entity may require the recipient or subrecipient to report at various multi-year frequencies, not to exceed a five-year reporting period.

Award and Post Award Requirements

Additional terms and conditions should be spelled out initially in the RFA or RFP, as well as in the grant agreement or contract that clearly detail the specifics related to authority/agreement to federal requirements. This includes establishing federal interest in the property, not selling, transferring, assigning or conveying any interest in the property without conveying a covenant of purpose, use and ownership, maintaining the same or like purpose for the property, and all disposition requirements as set forth by Uniform Guidance or program requirements.. To ensure appropriate language and requirements are included in grant agreements or contracts, departments should work with their Central Contracts Unit representative.

Monitoring will need to occur to verify that the property continues to be used for the same or like purpose. If the purpose of the involved property changes to a use outside of the given parameters, or if the property is sold, disposition requirements apply. The percentage of Federal Interest in the property would need to be calculated and that percentage would need to be returned to the federal entity unless specifically exempted.