Allowable and Non-Allowable Costs Guidance

3.38. Rental costs of buildings and equipment

Ref: 2 CFR Part 200, §200.465. 

Subject to the limitations described in paragraphs (b) through (d) of this section, 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. 

Rental costs under “sale and lease back” arrangements are allowable only up to the amount that would be allowed had the College continued to own the property. This amount would include expenses such as depreciation, maintenance, taxes, and insurance. 

Rental costs under “less-than-arm's-length” leases are allowable only up to the amount (as explained in paragraph (b) of this section). For this purpose, a less-than-arm's-length lease is one under which one party to the lease agreement is able to control or substantially influence the actions of the other. Such leases include, but are not limited to those between: (1) Divisions of the College; (2) The College under common control through common officers, directors, or members; and (3) The College and a director, trustee, officer, or key employee of the College or an immediate family member, either directly or through corporations, trusts, or similar arrangements in which they hold a controlling interest. For example, the College may establish a separate corporation for the sole purpose of owning property and leasing it back to the College. Obtain prior approval from NCCCS. 

Rental costs under leases which are required to be treated as capital leases under GAAP are allowable only up to the amount (as explained in paragraph (b) of this section) that would be allowed had the College 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 capital lease. Interest costs related to capital leases are allowable to the extent they meet the criteria in §200.449 Interest. Unallowable costs include amounts paid for profit, management fees, and taxes that would not have been incurred had the College purchased the property. 

The rental of any property owned by any individuals or entities affiliated with the College, to include commercial or residential real estate, for purposes such as the home office workspace is unallowable.