Additional Property Guidance

Depreciation charges must be supported by adequate property record. Physical inventories must be taken at least once every two years to ensure that the assets exist and are usable, used, and needed. Statistical sampling techniques may be used in taking these inventories. Depreciation records showing the amount of depreciation taken each period must be maintained.

Depreciation is computed applying the following rules. (45 CFR §75.436 ; effective on or after 10/1/2025: 2 CFR §200.436 ) The computation of depreciation must be based on the acquisition cost of the assets involved. For an asset donated to the recipient by a third party, its fair market value at the time of the donation must be considered as the acquisition cost. Such assets may be depreciated or claimed as matching but not both. 

For the purpose of computing depreciation under (c) of the regulation, the acquisition cost will exclude:

1. The cost of the land.
2. Any portion of the cost of the building paid or donated by the Federal government, irrespective of where title was originally vested or where it is presently located.
3. Any portion of the cost of the building contributed by or for the recipient, where law or agreement prohibits recovery.
4. Any asset acquired solely for the performance of a non-federal award.

When computing depreciation charges as outlined under (d) of the regulation, the following must be observed:

1. The period of useful service or life established in each case must take into account:
   • Type of construction.
   • Nature of asset.
   • Technological developments in particular area.
   • Historical data.
   • The renewal and replacement policies followed for the individual item or classes of assets involved.
2. Depreciation method used to charge the cost of an asset (or group of assets) to accounting periods must reflect the pattern of consumption of the asset during its useful life.
3. 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.
4. No depreciation may be allowed on any assets that have outlived their depreciable lives.
5. The total amount of use allowance and depreciation for an asset (including imputed depreciation applicable to periods prior to the conversion from the use allowance method as well as depreciation after the conversion) may not exceed the total acquisition cost of the asset.
6. Charges for depreciation must be supported by adequate property records, and physical inventories must be taken at least once every two years to ensure that the assets exist and are usable, used, and needed. Statistical sampling techniques may be used in taking these inventories. In addition, adequate depreciation records showing the amount of depreciation taken each period must also be maintained.

Generally Accepted Accounting Principles (GAAP) has the meaning specified in accounting standards issued by the Financial Accounting Standards Board (FASB) and the Government Accounting Standards Board (GASB). (45 CFR §75.2 ; effective on or after 10/1/2025: 2 CFR §200.1 )

• For public and private companies and not-for-profit organizations, FASB issued an update on lease accounting to increase transparency and comparability among business and other organizations to use leases. The updates are explained as an amendment to FASB Accounting Standards Codification (ASC) and are generally referred to as Topic 842 or FASB ASC 842. Effective Date(s): The requirements of Topic 842 are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022 (Amended). Early application continues to be allowed. For more information and updates, please see the FASB  website.
• For state and local governments, GASB issued GASB Statement No. 87 Leases (GASB 87) and related implementation guides to improve accounting and financial reporting for leases by governments. Effective Date: The requirements of GASB 87 are effective for reporting periods beginning after December 15, 2019. For more information and updates, please the GASB  website.

Leases are used as a means of gaining the right to use property, obtaining financing, or reducing exposure to the risks of full property ownership. Leases have historically been classified as either an operating lease or a capital lease.

While the distinction between operating leases and other types of leases are maintained in Topic 842, the terminology changed. “Non-operating” leases previously called capital leases are now called finance leases. Topic 842 also changed how the classification of leases between operating and finance leases are determined and how leases are presented on the organization’s audited financial statements. Operating leases were previously not represented on the organization’s balance sheet, whereas the assets and liabilities associated with capital leases were included. However, under this new update, both operating and finance leases must be reflected on the organization’s balance sheet and included in its annual independent audit. Auditees must first determine whether an occupancy arrangement is a lease and then decide, based on applicable criteria, whether the lease is operating or finance in nature.

Whereas, under GASB 87, applicable to state and local governments, begins with the premise that all leases are considered finance leases. This eliminates classification as an operating lease unless the lease meets the definition of a short-term lease under GASB 87. A short-term lease is characterized as a lease contract of 12 months or less (maximum of 12 months). Under GASB 87, the lessee/tenant is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor/landlord is required to recognize a lease receivable and a deferred inflow of resources. This change enhances the relevance and consistency of information about governments leasing activities. GASB 87 paragraph 19 states:

“A contract that (a) transfers ownership of the underlying asset to the lessee at the end of the contract and (b) does not contain termination options, but may contain a fiscal funding or cancellation clause that (with some certainty) may not be exercised, should be reported as a finance purchase of the underlying asset by the lessee or sale of the asset by the lessor.”

While this page incorporates some of the new lease standards, for more information, all covered recipients are encouraged to refer to the FASB  and the GASB  websites. ACF recipients are encouraged to work with their financial professional (e.g., Certified Public Accountant (CPA)) to understand how the new lease standard apply to them and ensure compliance.

In addition to determining whether a lease is an operating or finance lease, or, for state and local governments, short-term leases, recipients must also consider how their relationship to the lessor impacts the nature of their lease arrangements and allowable costs resulting from those agreements. Applicable uniform administrative regulations (Uniform Guidance) do not define the term “lease.” (45 CFR Part 75; effective on or after 10/1/2025: 2 CFR Parts 200 and 300) However, a lease is generally described as a contract establishing the terms under which one party (tenant; lessee) agrees to rent property owned by another party (landlord; lessor), which is owned by that party or a third party. Such agreements are typically labeled as leases, but may also be called “use agreements,” “occupancy agreements,” “memoranda of use,” or other similar terms. All arrangements involving the use of federal funds to pay occupancy costs to a third party, regardless of how they are labeled, are subject, at the discretion of ACF, to an administrative review. The substance of the agreement dictates its characterization as a lease.

Under the Uniform Guidance and ACF policy, leases generally fall under two categories: 1) “arm’s-length” or 2) “less-than-arm’s-length” arrangements. Recipients must only charge their award appropriate costs based on the rental costs of real property requirements (45 CFR §75.465; effective on or after 10/1/2025: 2 CFR §200.465), as well as any other relevant federal requirement.

An “arm’s-length” lease is an agreement with an unrelated party and follows the requirements of 45 CFR §75.465(a) (effective on or after 10/1/2025: 2 CFR §200.465(a) ):

“Rental costs are allowable to the extent that the rates are reasonable in light of such factors as: rental costs of comparable property, if any; market conditions in the area; alternatives available; and the type, life expectancy, condition, and value of the property leased. Rental arrangements should be reviewed periodically to determine if circumstances have changed and other options are available.”

Recipients must ensure that rental costs are reasonable and comparable to other like type properties. When requested, ACF may require funded recipients to provide rental cost analysis assessments to verify allowability, necessity, and reasonableness of costs. Examples of unallowable costs under an “arm’s-length” lease are any ownership type expenses such as: depreciation; taxes; property insurance; and any maintenance costs that are considered improvements adding to the property’s permanent value, or extending its useful life. Please note that property insurance costs, such as general liability insurance, which are typically the responsibility of the lessee/tenant, are allowable, but should not be included in the lease arrangement since they would be in the name of the lessee/tenant, and can be charged as a separate expense on the award.

A “less-than-arm's-length” arrangement is outlined under 45 CFR §75.465(c) (effective on or after 10/1/2025: 2 CFR §200.465(c) ).  Under the Uniform Guidance, “less-than-arm’s-length” arrangements are bound by the same restrictions as those on “sale and lease back” arrangements (45 CFR §75.465(b) ; effective on or after 10/1/2025: 2 CFR §200.465(b) ) which states rental costs are allowable only up to the amount that would have been allowed had the recipient owned the property. Generally, the allowable expense items related to property costs to support the rental charge include depreciation, maintenance, taxes, and property insurance. (45 CFR §75.465(b) and (c) ; effective on or after 10/1/2025: 2 CFR §200.465(b) and (c) ) However:

• Depreciation must meet the requirements of 45 CFR §75.436 (effective on or after 10/1/2025: 2 CFR §200.436 ). For more information, see Depreciation Guidance.
• Taxes are generally allowable unless, the agreement is classified as a finance lease under the Generally Accepted Accounting Principles (GAAP), at which time taxes are considered unallowable, per 45 CFR §75.465(c)(5 ) (effective on or after 10/1/2025: 2 CFR §200.465(d) ) and Topic 842; taxes on entities that are exempt from paying taxes in categories which qualify for exemption under 501(c)(3) status, and special assessments on land which represent capital improvements are also considered unallowable (45 CFR §75.470 , effective on or after 10/1/2025: 2 CFR §200.470 ) Please note that certain taxes are allowable, such as local taxes for fire/rescue (i.e., taxes which do not qualify for 501(c)(3) exemptions, etc.).
• "Routine" maintenance and repair costs are generally allowable and ordinarily treated as an indirect cost (HHS GPS). Maintenance and repair costs that are not a capital expenditure, meaning it neither adds to the permanent value of the property nor prolongs its intended life but keeps it in efficient operating condition, are allowable. When a maintenance and repair activity adds to the permanent value or useful life of the property, it must be treated as a capital expenditure (45 CFR §75.439 ; effective on or after 10/1/2025: 2 CFR §200.439 ) and alterations and renovations (A&R). These costs are allowable to the extent not paid through rental or other arrangements. For more information, see 45 CFR §§75.452 , 75.439 (effective on or after 10/1/2025: 2 CFR §§200.439 , 200.452 ), GAAP, and glossary term Alteration and Renovation (A&R) threshold.
• Minor A&R costs are allowable up to the major renovation threshold for the entire project period per land parcel. Recipients must seek specific approval in initial applications or submit post-award prior written approval requests by providing a detailed request.  A&R projects that cumulatively exceed the threshold over the project period per parcel are unallowable under awards that do not have explicit statutory authority to allow recipients to request and use federal funds for major A&R. For more information, please see Applicable ACF Programs with Real Property Authority, Unallowable Property Costs, and Glossary. Please note that a Notice of Federal Interest does not apply to minor A&R.   
• Costs incurred for ordinary and normal rearrangement and alterations of facilities are generally allowable as an indirect cost, 45 CFR §75.462 (effective on or after 10/1/2025: 2 CFR §200.462 ). However, rearrangements and alterations are examples of capital asset expenditures, for more information see the capital asset and capital expenditure definitions under the Uniform Guidance. Only programs with explicit statutory authority to allow recipients to request and use federal funds for normal arrangements and alterations that exceed the minor A/R threshold are allowed to direct charge these types of costs to the award. For more information see Applicable ACF Programs with Real Property Authority and content on the Real Property Guidance pages.

Identical to a capital lease in former FAS No. 13, a finance lease is treated like a “less-than-arm's-length” lease.  Rental cost under leases that are required to be accounted for as a financed purchase under GASB standards or a finance lease under FASB standards under GAAP are allowable only up to the amount (as explained in 45 CFR §75.465(b) ; effective on or after 10/1/2025: 2 CFR §200.465(b) ) that would be allowed had the entity purchased the property on the date the lease agreement was executed. The provisions of GAAP must be used to determine whether a lease is a financed purchase or finance lease. Interest costs related to these leases are generally allowable to the extent they meet the criteria in 45 CFR § 75.449  (effective on or after 10/1/2025: 2 CFR §200.449 ) and if the statutory authority allows such costs (see Applicable ACF Programs with Real Property Authority for programs that have this authority). Unallowable costs include amounts paid for profit, management fees, and taxes that would not have been incurred had the recipient purchased the property. 

Under GASB 87, as mentioned under New Lease Standards subheading, all leases are considered finance leases. Short-term leases (twelve months or less) are a type of finance lease, similar for financial and accounting purpose to an operating lease.

Under Topic 842, the criteria for determining a finance lease as opposed to an operating lease changed slightly. A lessee (ACF award recipient) must classify a lease as a finance lease when a lease meets any one of the following criteria:

1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. (Note: There is no change from the previous criteria. This criterion is considered an encumbrance or purchase and is only allowable with proper approval under ACF programs that have real property authority. For more information, see Applicable ACF Programs with Real Property Authority and Real Property Guidance. This option is unallowable as a direct cost under programs that do not have explicit authority to purchase real property.)
2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. (Note: There is no change from the previous criteria. This criterion is considered an encumbrance or purchase and is only allowable with proper approval under ACF programs that have real property authority. For more information, see Applicable ACF Programs with Real Property Authority and Real Property Guidance. This option is unallowable as a direct cost under programs that do not have explicit authority to purchase real property.)
3. The lease term is for a major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for the purposes of classifying the lease. (The previous FAS No. 13 criteria contained the “at least 75%” descriptor; however, Topic 842 removed the percentage. To reduce burden and confusion, ACF is retaining the previous “at least 75%” to clarify the subjective meaning of “a major part” of the remaining economic life.) Reminder: Under an ACF federal award, costs are allowable only up to the amount (as explained in 45 CFR §75.465(b) ; effective on or after 10/1/2025: 2 CFR §200.465(b) ) that would be allowed had the entity purchased the property on the date the lease agreement was executed.
4. The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) (relates to Residual Value Guarantees) equals or exceeds substantially all of the fair value of the underlying assets. (The previous FAS No. 13 criteria contained the “at least 90%” descriptor; however, Topic 842 removed the percentage. To reduce burden and confusion, ACF is retaining the previous “at least 90%” to clarify the subjective meaning of “equals or exceeds substantially all” of the fair market value.) Reminder: Under an ACF federal award, costs are allowable only up to the amount (as explained in 45 CFR §75.465(b) ; effective on or after 10/1/2025: 2 CFR §200.465(b) )that would be allowed had the entity purchased the property on the date the lease agreement was executed.
5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease. (Note: This is a new requirement) Few, if any, facilities funded by ACF are sufficiently specialized to fall within this classification, which is generally applied only to research, manufacturing, and other facilities that have no other commercial rental value to the lessor. Reminder: Under an ACF federal award, costs are allowable only up to the amount (as explained in 45 CFR §75.465(b) ; effective on or after 10/1/2025: 2 CFR §200.465(b) ) that would be allowed had the entity purchased the property on the date the lease agreement was executed.

The Uniform Guidance does not define an operating lease. However, generally an operating lease is a contract allowing a renter to use the asset temporarily and does not convey ownership rights of the asset. While operating leases are generally handled as a standard rental lease, the “arm’s length” and “less-than-arm's-length” lease must be considered. Anything that doesn’t meet the Topic 842 finance lease qualifier and GASB 87 financed purchase qualifiers is considered an operating lease.

Under GASB 87, all leases are considered finance leases, unless the lease is classified as a short-term lease. See content under New Lease Standards and Finance Lease.

Under Topic 842, operating leases, as well as finance leases, must appear in audits. Operating leases will need to be recognized on the balance sheet of entities that acquire usage of assets through leasing. A lessee (ACF award recipient) must do the following for operating leases:

1. Recognize the right-of-use asset and lease liability, initially measured as the present value of the lease payments, in the statement of financial position.
2. Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.
3. Classify all cash payments within operating activities in the statement of cash flows.

There are a variety of commercial lease structures, including standard and net lease, but these designations do not always fall in line with the classifications in Topic 842, GASB 87 and federal cost principle requirements, 45 CFR §75.465 (effective on or after 10/1/2025: 2 CFR §200.465 ). 

The following provides general examples of unallowable costs related to real property. The absence of a particular item of cost is not intended to imply that it is allowable or unallowable under Federal awards. For additional details, see Applicable ACF Programs with Real Property Authority, 45 CFR §§75.308 , 75.318(b) (effective on or after 10/1/2025: 2 CFR §§200.308 , 200.311 and 2 CFR §300.308 ), program statutes, regulations, and terms and conditions.

1. Any expenditure claimed or contributed to an award that is later to be found unallowable under the ACF program and/or was not approved by the authorized official may result in disallowed costs.
2. Any cost exceeding the major renovation threshold, unless the ACF program has real property authority and the recipient received approval from the authorized official. See Glossary.
3. Under arm’s length arrangements, any ownership type expenses such as depreciation, taxes, insurance, and maintenance and repair costs that are considered improvements which add to the permanent value, or are intended to prolong the intended life, of the property. (45 CFR §75.452 ; effective on or after 10/1/2025: 2 CFR §200.452 ) 
4. Under less-than-arms-length arrangements any costs above the depreciation, maintenance, taxes, and insurance amounts. (45 CFR §75.465(b) and (c ); effective on or after 10/1/2025: 2 CFR §200.465(b) and (c) )
5. For a recipient owned property, any costs above the depreciated value. (45 CFR §75.436 ; effective on or after 10/1/2025: 2 CFR §200.436 )
6. Any mortgage, loan, interest, or related cost claimed on an award that does not have authority to purchase/acquire, construct, and/or renovate property. 
7. Under an award that has real property authority, when there is no evidence that the recipient requested and/or received approval from the authorized approver (i.e., ACF Chief Grants Management Officer (CGMO)) to use federal funds to encumber (e.g., finance, loan, and/or related cost) with or without a subordination the property. 
8. Any federal funds used on an encumbrance that did not receive approval from the authorized approver (i.e., ACF CGMO).