Rm 17-01 Price

[Akinlolu Watters]

TheOffice of Head Start (OHS) is committed to the provision of services in good quality facilities with safe indoor and outdoor learning environments. This guidance is intended to support grantees in understanding the Head Start application and funding process for facilities activities. Head Start base grant funds in approved budgets may be used for the payment of rent under operating leases[i] and for repairs[ii] and minor renovations[iii] to facilities. Other facilities activities, including purchase, construction, and major renovations, as defined in 45 CFR 1305.2, require separate application for funding, as described in 45 CFR 1303.44 and 45 CFR 1303.45.

In this guidance, the term "Head Start" is used inclusively for Head Start, Early Head Start, and the Early Head Start-Child Care Partnerships. Regulations applicable to facilities activities funded by OHS are found primarily at Subpart E, Facilities, 45 CFR 1303 of the Head Start Performance Standards (HSPPS); Real Property, 45 CFR 75.318 of the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Health and Human Services (HHS) Awards (the Uniform Guidance); and the HHS Grants Policy Statement (GPS), including subsequent revisions or amendments. Additional guidance is available on the Head Start Early Childhood Learning and Knowledge Center (ECLKC) website:

Grantees are encouraged to submit applications for needed facilities activities so that real property needs can be fully understood by OHS. However, OHS has limited funds available for one-time funding applications and typically cannot fund all requests for facilities activities. Requests for facilities funding will be subject to funding priorities established by OHS and reflected in funding opportunity announcements.

A design guide and other materials to support planning for real property activities are available on ECLKC. Grantees are encouraged to engage in careful planning to assure that proposed real property activities address identified health and safety issues, reflect the results of community assessment and are eligible for funding under 45 CFR 1303.42.

Grantees may submit a written request for funding under 45 CFR 1303.43 to determine preliminary eligibility of a planned real property activity in advance of submitting a full facilities application under 45 CFR 1303.44 and 45 CFR 1303.45. Preliminary activities might include feasibility studies, cost estimates and initial indoor and outdoor environmental testing to assure suitability of the facility project being considered. Grantees are encouraged to discuss facilities projects with their Regional Program Specialist and Fiscal Operations Specialist well in advance of submitting a full application under 45 CFR 1303.44 and 45 CFR 1303.45.

Grantees may submit an application to use Head Start funds to purchase[iv] or construct[v] facilities, and for major renovation[vi] of facilities owned by the grantee or leased from a third party. Applications for facilities funding require the use of real property Form SF-429 (Cover Page) accompanied by Attachment SF-429-B (Request to Acquire, Improve or Furnish). Additional information needed to meet the requirements of 45 CFR 1303.44 and 45 CFR 1303.45 must accompany the Form SF-429 and Attachment SF-429B. Note that a separate application is not required for repairs or for minor renovations, as defined in 45 CFR 1305.2, but such activities may require prior written ACF approval if they meet the conditions of 45 CFR 75.308. An example is a kitchen repair that includes the purchase of equipment for which prior written approval is required by 45 CFR 75.308(c)(1)(xi).

A federal interest[vii] in real property is created when a grantee uses Head Start or other federal funds to purchase or construct real property[viii] or conduct major renovations on leased or owned property. Protection of the federal interest is required by the HSPPS, 45 CFR 75.323 and GPS, page II-67. The federal interest includes total project costs paid with federal funds, those amounts awarded directly from the OHS and amounts claimed by the grantee as cost sharing or matching for the project. 45 CFR 1305.2, definition, Federal interest.

Grantees should familiarize themselves with the definitions of these terms in 45 CFR 1305.2. Repairs and minor renovations, as defined, do not result in a federal interest, and do not require the filing of a notice of federal interest. Major renovations require full compliance with 45 CFR 1303 (Subpart E). While not common, it is anticipated that a grantee may engage in repairs, the aggregate value of which exceeds $250,000. In the event that a grantee proposes to spend more than $250,000 for repairs, the grantee must submit to ACF, in advance of commencing the proposed repairs, a certification from a licensed, independent architect or engineer indicating that the expenditures identified as repairs do not add significant value to the real property to be repaired or extend its useful life. If the required certification is not provided, the activity will be classified as a major renovation and compliance with 45 CFR 1303 (Subpart E) is required.

Sec. 644(g)(3) of the Head Start Act applies the Davis-Bacon and Related Acts (40 USC 276a et seq) to contractors and subcontractors engaged in covered construction and renovation activities in excess of $2,000 on facilities used to carry out Head Start activities. Covered Davis-Bacon Act activities are construction, alteration, or repair (including painting or decorating). If Head Start funds in excess of $2,000 are used toward the cost of covered activities, the Davis-Bacon Act applies. Grantees engaging in facilities activities of any type should familiarize themselves with the requirements of the Davis-Bacon Act to assure compliance. Compliance resources are available from the US Department of Labor:

The HSPPS require that loan agreements with third party lenders for property subject to a federal interest contain language providing ACF with certain rights as described in 45 CFR 1303.49(a)(1)-(7). These include notice of any borrower default in payment or performance, an opportunity to cure the default and the right to direct assignment of the loan to another grantee. In addition, grantees are also required to immediately notify ACF of any default in a loan agreement secured by property subject to a federal interest. 45 CFR 1303.49(b). Grantees successfully competing for a new service area may be required by OHS to accept assignment of loans associated with facilities continuing in Head Start use.

Grantees should be aware that loans with short-term maturity dates of less than 15 years (interest-only and balloon loans) will not generally be approved by ACF. A capital lease resulting in acquisition of title to real property[x] requires prior ACF approval and will only be considered in those rare instances in which the grantee acquires title to the property and the cost of acquisition of title under the capital lease does not exceed the fair market value of the property at the time the capital lease is or was entered into. As noted below, absent prior ACF approval of a capital lease, rental costs under leases which are required to be treated as capital leases under Generally Accepted Accounting Principles (GAAP) are allowable only up to the amount that would be allowed had the non-federal entity purchased the property on the date the lease agreement was executed. 45 CFR 75.465(c)(5).

A subordination agreement is a legal contract between ACF and a lender that allows the lender to establish first lien status on property already subject to a federal interest. Only ACF can agree to a subordination of the federal interest to the rights of a lender. Common situations where subordination agreements are requested include use of Head Start funds as a down payment with an accompanying mortgage for the balance of the purchase price and when property subject to an existing mortgage is refinanced after acquisition.

Grantees requesting a subordination agreement from ACF must submit real property Form SF-429 (Real Property Status Report, Cover Page) and SF-429-C (Disposition or Encumbrance Request). In addition, when the amount of federal funds already contributed to the facility prior to the subordination requires exceeds the amount to be provided by the lender seeking subordination, 45 CFR 1303.51 requires the grantee to show that funding is not available without subordination of the federal interest. This could be shown, for example, by a letter from the proposed lender stating that it will not fund the proposed loan without subordination of the federal interest.

Grantees are encouraged to consult their Regional Grants Specialist prior to submitting a subordination request to assure that the proposed subordination agreement includes all required terms and conditions, and that all supporting materials, including an independent appraisal of the current fair market value of property at issue and proposed loan documents, are completed and available to accompany the subordination request.

Leases for facilities are classified for accounting purposes as either operating leases or capital leases. To determine allowable costs, property subject to a capital lease is treated as though it were owned by the grantee, 45 CFR 75.465(c)(5) while the reasonable costs of operating leases are ongoing operating expenses[xi]. Capital leases resulting in the acquisition of title by the lessee (grantee) are sometimes referred to as lease-purchase agreements.

Rental costs under capital leases (except where previously approved in writing by ACF as a purchase) sale and leaseback agreements and less-than-arms-length lease arrangements are allowable only up to the amount that would be allowed had the grantee owned the leased property. This amount includes expenses such as depreciation, maintenance, taxes (if the grantee is not exempt) and insurance. 45 CFR 75.436.

For example, if the acquisition cost of a grantee-owned facility, excluding land, is $800,000 and its useful life is 40 years, allowable annual depreciation is $20,000 per year if the facility is used 100 percent for Head Start purposes and no federal funds or non-federal match have contributed to the acquisition cost of the facility.

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