Federal Assistance Manual Chapter 1-44

CHAPTER 1-44 ALTERATION AND RENOVATION OF FACILITIES WITH GRANT FUNDS APPROPRIATED FOR OTHER THAN CONSTRUCTION

• 1-44-00 General
• 1-44-10 Policy
• 1-44-20 Allowable Costs
• 1-44-30 Cost Analyses

1-44-00 GENERAL

1. This chapter establishes policies which will govern the allowance of the expenditure of OSM grant funds (other than funds for construction projects) for the alteration and renovation of facilities needed to accommodate grant-supported activities.

2. OSM may support research, training, service, demonstration, and other activities which cannot be undertaken without some modification of the facilities which the recipient will use to accomplish the project. The modifications may involve changes in the building's interior layout, environment, or utilities. Such costs are not normally included in the computation of indirect cost rates, but are charged to individual grants or cooperative agreements as a separate category of direct costs. With certain exceptions, the statutory authorities under which OSM makes research, training, service, and demonstration grants do not authorize the use of grant funds for construction. Consequently, the extent to which grant funds for alteration and renovation of the recipient's facilities can be permitted must be limited by policy.

1-44-10 POLICY

1. Alteration and renovation costs may be charged to an OSM grant or included as allowable costs for matching or cost sharing purposes provided:
   1. For each alteration or renovation that exceeds a total value of $75,000, a cost analysis shall be performed and submitted to OSM to justify alteration or renovation rather than lease or purchase in accordance with section 1-44-60 below and Chapter 1-410.

   2. The grant is not awarded to a foreign institution or to an individual.

   3. The building has an useful life consistent with program purposes and is architecturally suitable for conversion to the type of space required.

   4. The alteration and renovation is essential to the project supported by the grant and the space involved will actually be occupied by the designated project.

2. Recipients are required to anticipate the full extent of their alteration and renovation needs; and to describe, justify in terms of essentialness, and budget for those costs in the initial application. Accordingly, approval of a budget prior to award of a grant will constitute prior approval of alteration and renovation costs that are incurred as anticipated. If, however, an unanticipated need for additional alteration and renovation arises subsequent to the award of the grant, recipients shall be required to submit the request for OSM approval.

3. Inventory Requirements:
   1. Each separate building alteration and renovation that exceeds a total cost of $1,000 shall be inventoried and reported to OSM.

   2. The recipient shall account for modifications at the expiration of a grant. (See section 1-44-40F and Chapter 1-410).

   3. Retained properties/modifications shall be carried forward to subsequent grants or cooperative agreements.

4. Disposal of Modified Properties. When assets acquired with OSM grant funds are sold, no longer available for use in a federally-sponsored program or used for purposes not authorized by OSM, OSM's equity in the asset will be refunded in the same proportion as Federal participation in its cost. In case any assets are traded on new items, only the net cost of the newly-acquired assets is allowable.

1-44-20 ALLOWABLE COSTS

1. Alteration and renovation costs charged to grants or cooperative agreements shall be limited to the costs of modifying existing space and utilities within a completed and finished structure. The cost of adapting any of the following building features to the needs of the grant supported activity are allowable:
   1. Physical characteristics - interior dimensions, surfaces, furnishings, and finishes.

   2. Environment - temperature, humidity, ventilation,acoustics.

   3. Utility Services - plumbing, electricity, gas, vacuum.

2. The following costs are not allowable as alteration and renovation of facilities:
   1. New construction.

   2. Relocation of exterior walls, roofs, or floors.

   3. Installation of utilities, furnishings, or finishes in an unfinished shell space as to make it suitable for human occupancy. This limitation does not preclude modifying such space to make it suitable for purposes other than human occupancy; for example, the storage of survey equipment.

   4. Routine maintenance and repair of the institution's physical plant or equipment.

3. Costs of installing equipment may be listed as either equipment costs or alteration and renovation costs. These include the temporary removal and replacement of wall sections, door frames, etc., in order to place equipment in its permanent location. The costs of connecting utility lines, replacing finishes and furnishings, and installing any accessory devices required for the equipment's proper and safe utilization may be considered either equipment costs or alteration and renovation costs. Structural changes (e.g., permanent relocation of a partition as opposed to its temporary removal and replacement) must be shown as alteration and renovation costs.

1-44-30 COST ANALYSES

1. General requirements for analysis. The analysis of modifications, versus lease or purchase (see Exhibits X1-44-1 through 4 for an example) should be based on the following guidelines:
   1. All economic costs incurred as a result of modification of property must be included whether or not actually paid. Such costs not generally involving a direct payment include imputed increased market values of public property, State and local property taxes, and imputed insurance premiums.

   2. The costs that will occur in each year of the period of analysis must be estimated in constant dollars (i.e., effects of inflation excluded) in terms of the general price level at the time of modification.

   3. Alternatives will be compared on the basis of the expected time period of stable program use of the property. If such period is greater than the contract term permitted under authority for long-term leasing, the analysis should assume renewal of the lease at the last constant dollar payment.

   4. Cost projections may be changed over the period of analysis to reflect only real changes in costs due to changes in amounts of services or their prices relative to the general price level, e.g., for example, an increase in amount of repair and improvements at prices in effect at the beginning of the period of analysis or an increase in the relative price of these services.

   5. The present values of alternative cost projections over the relevant time period will be the basis for determining the most economic choice.

   6. The discount rate policy to be applied to cost projections to determine present value is specified in OMB Circular A-94. The rate represents an estimate of the internal rate of return on general purpose real property leased from the private sector, exclusive of property taxes and expected inflation. The OMB periodically reviews this discount rate estimate based upon the above criteria and revises the rate as necessary.

2. Costs to be included. Constant dollar cost projections will include the following, adjusted as necessary to insure valid comparisons:
   1. Alteration/renovation alternative.
      1. Purchase/lease/rental cost (as appropriate), (if the facility is State owned and rented to the recipient, rental cost will be used);

      2. Alteration/renovation costs (include all construction, installation, site, design, management, and other costs associated with the modifications of the asset and its preparation for use);

      3. Repair and improvement (after alteration/renovation);

      4. Operation and maintenance (after alteration/renovation);

      5. Imputed property taxes (after purchase, alteration and renovation);

      6. Imputed insurance premiums (after purchase, alteration and renovation); and

      7. Cost offset (after purchase, alteration and renovation): residual value at end of period.

   2. Purchase alternative
      1. Purchase costs (include all construction, installation, site, design, management, and other costs associated with the acquisition of the asset and its preparation for use);

      2. Repair and improvement;

      3. Operation and maintenance;

      4. Imputed property taxes;

      5. Imputed insurance premiums; and

      6. Cost offset: residual value at end of period.

   3. Lease alternative
      1. Lease payments;

      2. Repair and improvement (if not included in lease payments); and

      3. Operation and maintenance (if not included in lease payments).

   4. Lease-purchase (or purchase-contract) alternative.
      1. Lease payments;

      2. Repair and improvement (after purchase or if not included in lease payments prior to purchase);

      3. Operation and maintenance (after purchase or if not included in payments prior to purchase);

      4. Purchase costs (when acquired) less applicable credit for previous payments;

      5. Imputed property taxes (after purchase or if not included in payments prior to Purchase);

      6. Imputed insurance premiums (after purchase); and

      7. Cost offset (after purchase): residual value at end ofperiod.

3. Costs that may be excluded. Some costs may be excluded from each of the alternative cost projections if they are estimated to be the same for all alternatives or too small to affect the economic choice among the alternatives under consideration; for example, such conditions may exist for:
   1. Repair and improvement costs;

   2. Operation and maintenance costs;

   3. Property taxes; and

   4. Insurance premiums.

4. Estimating certain costs. Potential problems of estimating certain costs should be resolved as follows:
   1. Purchase costs. Determine market value for property that is already owned, donated, or acquired by condemnation.

   2. Imputed property taxes.
      1. Determine the property tax rate for comparable property in the intended locality. If there is no basis by which to estimate future changes in tax rates and assessed (taxable) value, the first-year rate and assessed value can be applied to all years.

      2. Multiply the assessed value by the tax rate to determine the annual charge.

      3. As an alternative to the procedure of section D.2.a and b above, obtain an estimate of the local effective property taxes from the Building Owners and Managers Association's Regional Exchange Reports. If there is no basis for estimating future property taxes, the first-year rate can be applied to all years.

   3. Imputed insurance premiums. Determine local estimates of standard, commercial coverage for like property from the Building Owners and Managers Association's Regional Exchange Reports.

   4. Annual lease payments.
      1. Determine annual lease payments for comparable property and terms of lease in the intended locality at the time of proposed acquisition.

      2. When estimates of lease payments are based on actual lease contracts on comparable property, they should be adjusted to exclude the expected inflation for the period to first renewal.

   5. Cost offset: residual value at end of period.
      1. The objective is to predict the market value of the property at the end of the time period under consideration, excluding inflation.

      2. Residual values of property are determined by applying a method that best approximates the historically observed changes in market values experienced. The residual value of the property is obtained by adding the results of a decrease in the constant dollar market value of the building and an increase in the constant dollar market value of the site.

      3. Whenever possible, the residual value of the property should be adjusted to incorporate the current market value for comparable property in similar locales for similar commercial property whose age is approximately equal to the period of analysis.

5. Present value calculations.

   Calculation of present values of the alternative cost projections will be performed in accordance with established discounting procedures, using either continuous or end-of-year discount factors.

FEDERAL ASSISTANCE MANUAL
January 2, 1998