FEDERAL INTEREST: THE GOVERNMENT S INTEREST IN PROPERTY ACQUIRED OR IMPROVED WITH FEDERAL FUNDS

Transcription

1 FEDERAL INTEREST: THE GOVERNMENT S INTEREST IN PROPERTY ACQUIRED OR IMPROVED WITH FEDERAL FUNDS Edward (Ted) Waters, Esq. Scott Sheffler, Esq. August 4,

2 AGENDA 1. Legal Concept of Federal Interest 2. Creation and Valuation of Federal Interest 3. Federal Right to Exert Control 4. Property Contributed as Cost Share 5. Questions 2

3 LEARNING OBJECTIVES Understand what a federal interest in property is. Understand the use, management, and disposition requirements applicable to real and personal property acquired with federal funds. Identify federal interest issues that may arise when offering real and personal property to satisfy cost sharing requirements. 3

4 Legal Concept of Federal Interest 4

5 CURRENT REGULATORY LANGUAGE 2 C.F.R [Property trust relationship]: Real property, equipment, and intangible property, that are acquired or improved with a Federal award must be held in trust by the [NFE] as trustee for the beneficiaries of the project or program under which the property was acquired or improved. The Federal awarding agency may require the [NFE] to record liens or other appropriate notices of record to indicate that personal or real property has been acquired or improved with a Federal award and that use and disposition conditions apply to the property. 2 C.F.R [Federal interest]: Federal interest means,... when used in connection with the acquisition or improvement of real property, equipment, or supplies under a Federal award, the dollar amount that is the product of the: (a) Federal share of total project costs; and (b) Current fair market value of the property, improvements, or both, to the extent the costs of acquiring or improving the property were included as project costs. Note: This definition provides a formula for calculating value, but fails to clearly say what it is... 5

6 LEGAL CONCEPT Is it a contractual obligation? Is it a property right? 6

7 LEGAL CONCEPT Is it a contractual obligation? Is it a property right 7

8 LEGAL CONCEPT We know from the UG (and the prior Circulars) that when grant funds are used to acquire property, nominal title vests in the grantee. 2 C.F.R. 311(a), 313(a). The federal interest is something else. 8

9 FEDERAL COURTS ADDRESSED THE NATURE OF THIS PROPERTY RIGHT Henry v. First National Bank (Mississippi Action for Progress (MAP)) (5th Cir. 1979) Palmiter v. Action (7th Cir. 1984) In re Joliet-Will (7th Cir. 1988) Neukirchen v. Wood County Head Start (7th Cir. 1995) In re Premier Airways (W.D.N.Y. 2003) 9

10 PROPERTY RIGHT Henry v. First National Bank (Mississippi Action for Progress (MAP)) (5th Cir. 1979) United States intervened in a state court anti-trust case in which grantee bank accounts had been attached pending the outcome of that case. Funds only. Court reasoned: The United States retains a reversionary interest in all grant funds and in all property purchased with such funds that can no longer be used for the narrow purposes specified in the [Head Start] Act and regulations. Court concluded: Funds and property could not be attached by state court. 10

11 PROPERTY RIGHT Palmiter v. Action (7th Cir. 1984) United States intervened in a state court personal injury case in which plaintiff sought to garnish grantee funds to satisfy a judgment. Funds only. Court reasoned: It is well settled that federal monies are not subject to garnishment proceedings until they have been paid out for the purposes for which they were appropriated. Court concluded: Federal funds in hands of grantee that are not yet expended are immune from garnishment. Adopts MAP s equitable, reversionary interest description. 11

12 PROPERTY RIGHT In re Joliet-Will County Community Action Agency (7th Cir. 1988) United States intervened in a state court bankruptcy case in which the court considered whether federal funds, equipment, and supplies acquired with those funds are part of the bankruptcy estate. Funds and Federally-funded Property (Court avoids distinguishing between equipment above and below $1000 in value) Court reasoned: The terms upon which the grants were made rendered Joliet-Will akin to a trustee, custodian, or other intermediary, who lacks beneficial title... Court concluded: The federal funds and federally-funded property were not assets of the bankruptcy estate. 12

13 PROPERTY RIGHT Neukirchen v. Wood County Head Start (7th Cir. 1995) United States intervened in a state court case in which employment discrimination plaintiff sought to enforce judgment against grantee funds and federally-funded property. Funds and Federally-funded Equipment under $1,000 in value. Court reasoned: Under prior regulations (which were very similar to the current UG language) as long as retained by the grantee for use in the original project or another federally-funded project, the result is the same as in In re Joliet-Will. Upon grantee determination that the property is no longer needed for such purposes, it ceases being federal property. Court concluded: Plaintiff could not attach the grantee s federal funds and federally-funded property. 13

14 PROPERTY RIGHT (JUST QUICKLY ON THIS CASE) In re Premier Airways (W.D.N.Y. 2003) (Quickly) United States intervened in a state court bankruptcy case. Federally-funded Real Property Court reasoned: No fundamental dispute with In re Joliet-Will, but distinguished cases involving real property on the grounds that a bankruptcy trustee s relationship to real property of debtor estate is as if the trustee were a bona fide purchaser (i.e., purchaser who pays value and takes title without notice of the interest). As such, the Court concluded the real property was part of the estate and available for distribution. Interesting Question: Does this mean the federal government has no rights against a bona fide purchaser of property in which there is a federal interest? 14

15 Creation and Valuation of Federal Interest (How does a Federal Interest take hold, and Who owns What Share of the Equitable Interest in the Property) 15

16 CREATION OF THE FEDERAL INTEREST A Federal Interest is created by: Federal funding of equity No Federal Interest is created by charging depreciation or mortgage interest to a grant. Depreciation is mere loss of value over time and mortgage interest is an operating expense. 16

17 VALUATION The Real Property rule is explicitly stated at 2 C.F.R (c)(2): Upon disposition by sale, [t]he amount due the Federal awarding agency will be calculated by applying the Federal awarding agency s percentage of participation in the cost of the original purchase (and cost of any improvements) to the proceeds of the sale... The Equipment rule is explicitly stated at 2 C.F.R (e)(2): Upon disposition by sale, [t]he Federal awarding agency is entitled to an amount calculated by multiplying the current market value or proceeds from sale by the Federal awarding agency s percentage of participation in the cost of the original purchase... 17

18 VALUATION There are three common scenarios in which the grantee s share and the government s share of equitable ownership are typically calculated: 1. Original Acquisition Funded in Whole or In Part with Federal Funds (easy) 2. Federally Funded Improvements 3. Acquisition Debt (e.g., mortgage) Repaid with Federal Funds 18

19 1. ORIGINAL ACQUISITION FUNDED ALL/PART WITH FED FUNDS $1 Million Purchase Price 30% Private 70% Fed 19

20 1. ORIGINAL ACQUISITION FUNDED ALL/PART WITH FED FUNDS $10 Million Sale Price 30% Private 70% Fed 20

21 2. FEDERALLY FUNDED IMPROVEMENT Same Basic Rule/Concept: At disposition, federal agency entitled to: Federal awarding agency s percentage of participation in the cost of the original purchase (and cost of any improvements) x the proceeds of the sale. 21

22 2. FEDERALLY FUNDED IMPROVEMENT But Harder to Calculate Privately Owned (Original Price: $600,000) Ten Years Later FMV Unknown + Federally funded Improvement ($200,000 Renovation) 22

23 2. FEDERALLY FUNDED IMPROVEMENT Need Appraisal Just Before the Improvement Document contemporaneously and keep your documentation! Need to Know FMV Here to Figure Out how the $200k figures in as a Percentage. + Federally funded Improvement ($200,000 Renovation) 23

24 2. FEDERALLY FUNDED IMPROVEMENT Note on Leasehold Improvements: If you improve leased property with federal funds, a federal interest is created in the property even though you are not the owner. Agencies will often require as part of a grant application for funds to improve leased property a landlord letter of consent that includes: (a) acknowledgment of the federal interest that will be created in the landlord s property, and (b) walk-in rights for the agency if the grantee/lessee fails to make rent payments. Interesting Question: Does the federal property right terminate at the end of your lease term on the theory that the grantee can only give the government, via the grant agreement, an interest to the extent the grantee had a property interest? Or, does the interest flow into the property with the expenditure of the federal funds, transcending the limitations of the grantee s lease rights and attaching forever? 24

25 3. ACQUISITION DEBT REPAID WITH FEDERAL FUNDS (MORTGAGE) Preliminary Matter of Allowability: Mortgage principal is a capital expenditure. Note, prior approval is required for capital expenditures. 2 C.F.R (Equipment and other capital expenditures). Mortgage interest is allowable (termed a financing cost ) if it meets certain specific requirements. 2 C.F.R (Interest). Mortgage interest is an operating expense. 25

26 3. ACQUISITION DEBT REPAID WITH FEDERAL FUNDS (MORTGAGE) The standard valuation rules (2 C.F.R and ) still apply, i.e., share of original purchase price. The purchase price is just a little harder to calculate and the shares of that price change over time as the government pays into the purchase price through the mortgage payments. 26

27 3. ACQUISITION DEBT REPAID WITH FEDERAL FUNDS (MORTGAGE) Again Same Basic Rule/Concept: At disposition, federal agency entitled to: Federal awarding agency s percentage of participation in the cost of the original purchase (and cost of any improvements) x the proceeds of the sale. Again Just a bit harder to calculate... the shares of the original purchase price change over time as the government pays into the purchase price through the mortgage payments. 27

28 3. ACQUISITION DEBT REPAID WITH FEDERAL FUNDS (MORTGAGE) Moment of Purchase (Down Payment) Shares: 50/50 $500,000 Facility Purchased in % Down Payment with Fixed Rate 20 year Mortgage Down Payment Paid 50/50, All Mortgage Charged to Grant Mostly Interest Paid in Early Years, Mostly Principal in Later Years Year 5 Shares: 58/42 Year 15 Shares: 88/12 Year 20 Mortgage Paid Off Shares: 90/10 Bank $400k Feds $50k Grantee $50k $380k $70k $50k $50k $400k $450k $50k $50k 28

29 3. ACQUISITION DEBT REPAID WITH FEDERAL FUNDS (MORTGAGE) Moment of Purchase (Down Payment) Shares: 50/50 $500,000 Facility Purchased in % Down Payment with Fixed Rate 20 year Mortgage Down Payment Paid 50/50, All Mortgage Charged to Grant Mostly Interest Paid in Early Years, Mostly Principal in Later Years Year 5 Shares: 58/42 Year 15 Shares: 88/12 Year 20 Mortgage Paid Off Shares: 90/10 Bank $400k Feds $50k Grantee $50k $380k $70k $50k $50k $400k $450k $50k $50k 29

30 Federal Right to Exert Control (Property Use, Management, and Disposition) 30

31 PROPERTY TRUST RELATIONSHIP 2 C.F.R [Property trust relationship]: Real property, equipment, and intangible property, that are acquired or improved with a Federal award must be held in trust by the [NFE] as trustee for the beneficiaries of the project or program under which the property was acquired or improved. The Federal awarding agency may require the [NFE] to record liens or other appropriate notices of record to indicate that personal or real property has been acquired or improved with a Federal award and that use and disposition conditions apply to the property. As trustee of property acquired or improved with a Federal award, the NFE has numerous responsibilities. 31

32 FEDERAL RIGHT TO CONTROL: ROADMAP A. Use Requirements Real Property Equipment B. Management Requirements Real Property Equipment C. Disposition Requirements Real Property Equipment 32

33 A. USE REQUIREMENTS: REAL PROPERTY SUMMARY: Use for originally authorized purpose as long as needed for that purpose Do not dispose or encumber title 2 C.F.R (b) 33

34 A. USE REQUIREMENTS: REAL PROPERTY 2 C.F.R (b) Simple and restrictive 34

35 A. USE REQUIREMENTS: EQUIPMENT SUMMARY: Use in program/project for which it was acquired, as long as needed. If excess capacity, make available for others in following order: (1) Program/project funded from same Federal awarding agency (2) Program/project funded from other Federal awarding agencies If no longer needed for original program/project, make available in following order: (1) Program/project funded from same Federal awarding agency (2) Program/project funded from other Federal awarding agencies 2 C.F.R (c)(1)-(2) 35

36 A. USE REQUIREMENTS: EQUIPMENT 2 C.F.R (c)(1)-(2) 36

37 A. USE REQUIREMENTS: EQUIPMENT 2 C.F.R (c)(1)-(2) 37

38 B. MANAGEMENT REQUIREMENTS: REAL PROPERTY SUMMARY: Submit reports at least annually on status of real property unless Federal interest extends 15 years or longer If Federal interest extends 15 years or longer, the Federal awarding agency (or pass-through entity) may require the NFE to report at various multi-year frequencies 2 C.F.R

39 B. MANAGEMENT REQUIREMENTS: REAL PROPERTY 2 C.F.R

40 B. MANAGEMENT REQUIREMENTS: EQUIPMENT SUMMARY: Records Maintain property records, which include information such as source of funding and percentage of Federal participation in the project costs for the Federal award under which the property was acquired Management Take physical inventory of property and reconcile results with property records Develop a control system to prevent loss or damage Develop maintenance procedures to keep property in good condition 2 C.F.R (d) 40

41 B. MANAGEMENT REQUIREMENTS: EQUIPMENT 2 C.F.R (d) 41

42 B. MANAGEMENT REQUIREMENTS: A NOTE ON FEDERAL INTEREST Grantees are sometimes required to file a Notice of Federal Interest (NOFI) on property as to which there exists a federal interest A NOFI functions as a lien on the property to protect the Federal Government s interest Note: Federal interest may exist even absent a requirement to file a NOFI 42

43 C. DISPOSITION REQUIREMENTS: REAL PROPERTY SUMMARY: When real property is no longer needed for originally authorized purpose, NFE must obtain disposition instructions which must provide for one of three alternatives: 1. Retain title and compensate Federal awarding agency 2. Sell and compensate Federal awarding agency 3. Transfer title to Federal awarding agency or other approved third party, and compensate NFE 2 C.F.R (c) 43

44 C. DISPOSITION REQUIREMENTS: REAL PROPERTY 2 C.F.R (c) 44

45 C. DISPOSITION REQUIREMENTS: EQUIPMENT SUMMARY: When equipment is no longer needed for original program/project or for other activities currently or previously funded by a Federal awarding agency, the NFE must request disposition instructions if required by terms/conditions of Federal award. Disposition occurs as follows: 1. If FMV is $5,000 or less, no further obligation to Federal awarding agency 2. If FMV is more than $5,000, the equipment may be retained by the NFE or sold, but the Federal awarding agency is entitled to compensation 3. NFE may transfer title to property to Federal Government or an eligible third party, but the NFE must be entitled to compensation 2 C.F.R (e) 45

46 C. DISPOSITION REQUIREMENTS: EQUIPMENT Remember: Neukirchen (7th Cir. 1995) (Fn. 4) 2 C.F.R (e) 46

47 Property Contributed as Cost Share 47

48 PROPERTY COUNTED AS COST SHARE When does equity as match come up? Cost Sharing regulations are written in a confusing manner, but when the various portions (in particular (d), (g) and (h)) are combined and distilled, they explain: Contributed by NFE: Equity in Real Property can be used for match when Project purpose is facility/land acquisition Project purpose is operational, and agency specially approves contribution for long-term use Equity in Equipment generally can be used for match Contributed by Third Party (i.e., donation to NFE): Equity in Real Property and Equipment can be used for match when project purpose is acquisition of Equipment or Facility Otherwise, generally can only count depreciation as match Remember: Depreciation does not create any federal interest. 48

49 PROPERTY COUNTED AS COST SHARE If you have a situation where equity is recognized as match, you need to know how to calculate the federal and non-federal shares at disposition. The rules at and do not control since there is no federal participation per se in the acquisition cost. Instead... 49

50 PROPERTY COUNTED AS COST SHARE 1. Respective interested valued based upon percentage participation in total project (allowable) costs. 2. Remember: Calculation is specific to the particular award (project) under which the cost sharing was counted. 50

51 PROPERTY COUNTED AS COST SHARE These regulations are unfortunately far from explicit. There are two other useful sources of this principle: Department of Energy supplement to the Uniform Guidance (for for-profits) HHS DAB Case: Peoples Involvement Corporation, DAB No (Mar. 25, 2005) 51

52 PROPERTY COUNTED AS COST SHARE DOE Regulation 2 C.F.R (d): Title to and Federal interest in real property or equipment offered as costshare. As provided in 2 CFR (h), depending upon the purpose of the Federal award, a recipient may offer the fair market value of real property or equipment that is purchased with recipient s funds or that is donated by a third party to meet a portion of any required cost sharing or matching. If a resulting award includes such property as a portion of the recipient s cost share, the recipient holds conditional title to the property and the Government has an undivided reversionary interest in the share of the property value equal to the Federal participation in the project. The property is treated as if it had been acquired in part with Federal funds, and is subject to the provisions of paragraph (b) of this section and to the provisions of 2 CFR and [i.e., use, management, and disposition requirements for real property and equipment]. 52

53 PEOPLES INVOLVEMENT CORPORATION, DAB NO (MAR. 25, 2005) Grant Real Property Equity as Match $345,000 $217,000 Construction grant from ACF Office of Community Service to develop an office and retail space. When federally-funded project collapsed after other funding fell through, PIC sold the real property without prior approval. The real property was a project asset. Agency must be credited for the Federal share in the project. The federal interest would be defined as the relative percentage of federal funds in performance of the project. To account for the federal interest[,] PIC will need to document both federal and non-federal contributions to the project, and allocated the proceeds of the disposition of the real property accordingly. 53

54 Questions? 54