Allowable costs for federal grants – can we buy a building?

In that list of costs that are not allowable (found in 45 CFR 75) Interest is sometimes allowable and sometimes not. Generally, interest on loans to manage your cash flow are not deductible whether they are line of credit loans, credit card charges, short term loans, or internal charges for borrowing from your own funds including temporary or permanently restricted funds. .

I think we all agree that interest is a substantial part of the costs for buying a building. Here is what IS allowed:  Financing costs (including interest) to acquire, construct, or replace capital assets are usually allowed. An asset cost includes (as applicable) acquisition costs, construction costs, and other costs capitalized. Typically this means that the purchase costs for a building are allowed, assuming it is where you provide services and not as an investment or for another purpose. You must use the capital assets — including a purchased building — to support your Federal grant award.

Some organizations put their building into a separate entity for legal protection or other reasons. However, that entity can’t charge you — and you can’t charge any more to federal awards — than you would if you owned the building.

You may want to look at a lease-purchase arrangement. You can do so if you can substantiate that the the reimbursement costs, including interest, are less costly than another alternative such as a standard lease or an outright purchase. (It seems likely that a lease purchase would include some additional costs that would always be in excess of a lease amount.)

One of the conditions is that you expense or capitalize allowable interest costs in accordance with Generally Accepted Accounting Procedures (GAAP).

If your plans include incurring a debt of over $1 million to purchase or construct your building, unless you can contribute 25% of the purchase cost outright (an “initial equity contribution”), there are some conditions. First, you cannot be reimbursed for all the interest if the building is being used for multiple projects. You have to make sure only the part actually used for a project is charged to that project. Secondly, you have to complete a somewhat complicated monthly report of cash inflows and outflows related to the building and allocate costs and cash flows properly. If you have money coming in (inflows), you will need to adjust the amount you request from the grant to take that into consideration.

Most centers that are buying a building calculate what they can be reimbursed for through depreciation. Details are found in 45 CFR 75.436.

Depreciation is the method for allocating the cost of fixed assets to periods benefiting from its use. You may be compensated for the use of your building, provided that it is needed in the activities of your grant, and properly allocated to Federal awards. Such compensation must be made by computing depreciation and allocating it properly.  To the extent your building is also used for administration, you can also include some of the cost in indirect.

The computation of depreciation must be based on the acquisition cost of the assets involved. If you are lucky enough to receive a donated building or property, you can either use the value for match, or may depreciate based on the property’s fair market value at the time of the donation . That fair market value is treated as though it was your acquisition cost. You will want to have an accountant assist you with this — the regulations are thorough and you must meet all the requirements. There are costs that you can’t depreciate, like the cost of the land. You will need to establish the useful service or useful life of the building. Then you will compute it’s monthly value over its lifetime and that is your monthly depreciation that can be charged to your grant as a direct or indirect cost.

You can consider the entire building, including all its components, or you can break it into multiple components and depreciate each separately. The entire building, including the shell and all components, may be treated as a single asset and depreciated over a single useful life. A building may also be divided into multiple components. Each component item may then be depreciated over its estimated useful life. The building components must be grouped into three general components of a building: building shell (including construction and design costs), building services systems (e.g., elevators, HVAC, plumbing system and heating and air-conditioning system) and fixed equipment (which a CIL would not typically have, but includes things like sterilizers, casework, fume hoods, cold rooms and glassware/washers).

If you choose the depreciation method of identifying and being reimbursed for your costs, make sure you support your depreciation calculations with property records and document how you came up with the figure you are using. Again, this is complex so you should consult with someone before selecting this method.

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