Federal Assistance Manual Chapter 6-10

CHAPTER 6-10 CHARGES FOR LEASED FACILITIES AND EQUIPMENT

• 6-10-00 Purpose
  
• 6-10-10 Background
  
• 6-10-20 Definitions
  
• 6-10-30 Policy

6-10-00 PURPOSE

The purpose of this Chapter is to establish OSM's policy on the extent to which the costs of leased facilities and equipment may be charged to OSM grants and cooperative agreements.

6-10-10 BACKGROUND

1. Activities supported by OSM grants and cooperative agreements are normally performed in or with facilities and equipment owned by the performing organization. The costs of these facilities and equipment are generally charged to the grants through depreciation or use charges as provided for in the cost principles applicable to the particular type of organization involved. See Chapter 6-00.

2. In some cases, however, the leasing of facilities or equipment is more economical or is otherwise necessary in light of the particular circumstances involved; for example, where:
   1. A project is of short duration and space or equipment is not available in owned facilities;

   2. There are specific program objectives or requirements which cannot be met with owned facilities;

   3. Cost reductions will materialize which will produce identifiable savings in direct or indirect costs; or

   4. There is an increase in workload volume which cannot be accommodated efficiently by modifying or augmenting owned facilities.

6-10-20 DEFINITIONS

Certain definitions are critical to the understanding of this chapter and, therefore, are provided below:

1. Short-Term Lease is a lease under which the cumulative term of the use or occupancy is two years or less for personal property and five years or less for real property.

2. Long-Term Lease is a lease under which the cumulative term of the use or occupancy is more than two years for personal property and more than five years for real property. A lease with an initial term of two years or less for personal property, and five years or less for real property, becomes a long-term lease as of the effective date of the document which extends the cumulative term to more than two or five years, and shall be treated as a short-term lease prior to such date and as a long-term lease on and after such date.

3. Sale and Leaseback Arrangement is an arrangement under which property owned by the lessee organization is sold to and leased back from another organization.

4. Less Than Arms Length Lease is a lease under which one party to the lease agreement is able to control or substantially influence the actions of the other. Such leases include those between (a) divisions of an organization; (b) organizations under common control through common officers, directors or members and (c) an organization and a director, trustee, officer or key employee of the organization or his immediate family either directly or through corporations, trusts or similar arrangements in which they hold a controlling interest

5. Lease Which Creates a Material Equity in Property is a lease under which the lessee acquires a material equity in the leased property. A material equity in the property exists if the lease is noncancelable or is cancelable only upon the occurrence of some remote contingency and has one or more of the following characteristics:
   1. The term of the lease corresponds substantially to the estimated useful life of the property (i.e., the period of economic usefulness to the legal owner of the property).

   2. The initial term is less than the useful life of the property and the lessee has the option to renew the lease for the remaining useful life at substantially less than fair rental value.

   3. The lessee has the right, during or at the expiration of the lease, to purchase the property at a price which at the inception of the lease appears to be substantially less than the probable fair market value at the time the lessee is permitted to purchase the property.

   4. Title to the property passes to the lessee at some time during or after the lease period.

   5. The property was acquired by the lessor to meet the special needs of the lessee and will probably be usable only for that purpose and only by the lessee.

6-10-30 POLICY

1. Short-Term Leases - Rental costs under short-term leases are allowable to the extent that:
   1. The rates are reasonable at the time of the decision to lease in light of such factors as: rental costs of comparable property, if any; market conditions in the area; the type, life expectancy, condition and value of the property leased; alternatives available, etc. and

   2. They do not give rise to a material equity in the property but represent charges only for the current use of the property including, but not limited to, and incidental service costs such as maintenance, insurance and applicable taxes.

2. Long-Term Leases
   1. Rental costs under long-term leases are allowable only up to the amount the lessee would be allowed under applicable OSM cost principles had it purchased the property on the date the lease agreement is executed. However, if the lessee can demonstrate, based on the facts existent at the time of the decision to lease on a long-term basis, that such leasing (a) will result in less cost to the lessee over the total period that the property will be used in the lessee's operations or (b) is clearly necessary in light of the particular circumstances involved, the rental costs for the term of the lease shall be subject to the same criteria set forth for short-term leasing. If the lessee subsequently renews the lease, it must again demonstrate that leasing will result in less cost or is clearly necessary in light of the circumstances involved, if it wishes to continue having rental costs evaluated by the criteria for short-term leasing.

   2. A lessee's justification for charging rental costs under long-term leases in excess of the amount that would be allowed had it purchased the property shall, at a minimum, consist of the following supporting documentation prepared prior to leasing:
      1. Analysis of the utilization of existing property,

      2. Comparative cost analysis for the total period that the property will be used in the lessee's operations,

      3. Specific objectives or requirements,

      4. Solicitation of proposals from available sources, and

      5. Proposals received in response to the solicitation and reasons for selection of the property chosen and for the decision to lease.

      In performing a comparative cost analysis, the cumulative costs that would be incurred if the lessee owned the property should be compared with the cumulative costs that would be incurred under the leasing arrangement. This analysis should include all applicable costs associated with ownership of the property (e.g., operation, maintenance, insurance, taxes, depreciation or use charges, etc.) except interest and other unallowable costs stipulated in applicable OSM cost principles. The analysis should also include all applicable costs under the leasing arrangement (e.g., rental costs, leasehold improvements, maintenance, if the lessee is required to maintain the property, etc.). In those situations where leasing was formerly classified as short-term leasing, the purchase cost, for purposes of cost comparison, will be the price at which the property could be purchased on the date that the agreement meets the qualifications for long-term leasing. If purchase is determined to be the method of acquisition which would result in less cost to the lessee, such determination shall not be applied to the years when the leasing was classified as short-term leasing.

   3. The documentation described above shall be retained by the lessee for the period stipulated in OSM's records retention regulations and be made available for verification during the course of an audit or other review made by, or on behalf of, OSM. It need not be submitted to OSM unless it is specifically requested.

3. Sale and Leaseback Arrangements - Rental costs under sale and leaseback arrangements are allowable only up to the amount that would be allowed under applicable OSM cost principles had the lessee retained legal title to the property. However, if the lessee can demonstrate and document based on the comparative cost analysis described in subparagraph B.2 above that the arrangement will result in less cost to the lessee over the total period that the property will be used in the lessee's operation, rental costs will be subject to the same criteria set forth for short-term leasing.

4. Less Than Arms Length Leases - In all cases, rental costs under less than arms length leases are allowable only up to the amount that would be allowed under applicable OSM cost principles had title to the property vested in the lessee.

5. Leases Which Create Material Equity in Property - In all cases, rental cost under leases which create a material equity in the leased property are allowable only up to the amount that would be allowed under applicable OSM cost principles had the lessee purchased the property on the date the lease agreement is executed.

6. Prior Approval Requirements
   1. The policies contained in this Chapter do not affect the provisions of applicable cost principles requiring recipients to obtain prior approval of certain types of leasing arrangements. These policies, however, will be followed in determining the extent to which the rental costs under such arrangements may be charged to OSM grants and cooperative agreements.

   2. Prior approval of leases in addition to those specified in the cost principles will not be required. However, in order to avoid possible future cost disallowance, recipients are encouraged to consult with the Federal assistance unit and reach an advance understanding with the agency prior to the allowability of the rental costs to be paid under the lease. Where possible, this should be done prior to the award of the grant to which the rental costs will be charged. Similarly, if the rental costs are to be treated as indirect costs, the recipient should consult with the appropriate Federal cognizant agency prior to entering into the leasing arrangement if it is unsure about the amount of such costs that can be included in its indirect cost pool. See Chapter 6-100.

FEDERAL ASSISTANCE MANUAL
January 2, 1998