Welcome to Feldesman’s Grants Practice Shorts series where we discuss helpful tips and strategies in common areas of federal grant management. Be sure to check out our other installments on our Grants Practice Shorts page.

Allowability of Rental Costs

As a general rule, grantees may use grant funds to pay the costs of renting real property or equipment.  Rental costs must be reasonable when considered against rates for comparable property, area market conditions, options available and the type, life expectancy, condition and value of the leased property.  See 2 C.F.R. § 200.465(a).

Grantees must note that allowable rental costs are limited under “less-than-arm’s-length” leases, which are arrangements in which one party to the lease agreement is able to control or substantially influence the actions of the other party to the lease. Such a circumstance will generally arise, for example, in rental of property owned by a controlled subsidiary; but can also arise from situations of less-direct control.

Costs under “less-than-arm’s-length” leases are allowable only up to the amount that would be allowed if the grantee owned the property, including: depreciation, maintenance, taxes (if grantee is not exempt), and insurance. These “ownership costs” could represent substantially less than monthly rent costs of fair market value, leading to disallowance of any difference.

On the other hand, where a grantee leases property from an unrelated (“arm’s-length”) third-party, the reasonable costs of the lease are generally allowable, to the extent allocable to the grant as operating expenses.  Grantees are encouraged to review their rental arrangements “periodically to determine if circumstances have changed and other options are available.” 2 C.F.R. § 465(a).