SUBJECT: Peoples Involvement Corporation

DECISION

Peoples Involvement Corporation (PIC) appealed determinations by the Office of Community Services (OCS), a component of the Administration for Children and Families (ACF), disallowing $845,000, the full amount of federal grant funds awarded to PIC under two separate grant awards. At issue are grant awards for PIC to develop two projects in Washington, D.C.: an award of $345,000 for the period July 1, 2000, through June 30, 2003 to develop an office and retail space at 2908 Georgia Avenue, N.W. (Georgia Avenue Development project) and an award of $500,000 for the period September 30, 1999, through September 29, 2004 to establish a day care center at 1842-50 7^th Street, N.W. (Peoples Day Care Center project). The disallowances were based on OCS determinations that PIC had materially breached the terms and conditions of the grant awards by failing to pursue the project according to the approved grant application.

For the reasons discussed below, we uphold the disallowances in the amount of $317,901.58. These expenditures were for personnel costs inconsistent with the express grant terms, were for costs incurred and/or paid before the project period, or were otherwise not documented to be within the scope of the grant. With respect to the remaining amount disallowed, we find that PIC was required to account for its sale of real property assets and we permit PIC a brief opportunity to submit an accounting of their disposition for OCS review. If PIC fails to timely submit any further accounting, we uphold the remaining disallowance at issue here on the basis that PIC failed to demonstrate that it did not profit from the sale of the project assets by at least that amount. If PIC timely submits such an accounting, OCS shall have a brief opportunity to notify PIC that, for reasons consistent with this decision, the accounting does not support the allowability of some or all of the remaining $527,098.42 disallowance at issue here. PIC may appeal to the Board within 30 days of receiving such a notice.

Factual and Procedural Background

We summarize the course of events concerning each grant award separately below.

Georgia Avenue Development Grant (Grant #090EE534): In November, 1999, PIC applied for a grant of $345,000 to cover costs associated with the construction and redevelopment of commercial and retail establishments along the 2900 block of Georgia Avenue, N.W., in Washington, D.C. PIC Ex. 3. The request was for 26% of the total anticipated budget for the project, and, in the grant application, PIC indicated that PIC was "contributing the value of PIC's equity in the 2900 Georgia Avenue project at $217,000 as part of the match," in addition to "funds from Howard University, DHCD and BB&T Bank (Franklin) [that] total over $600,000." Id. at 24, 29. In the grant application, PIC indicated that there were two major components to the project, both of which were considered by PIC to be "hard costs." Id. at 20. These were identified as demolition of existing buildings on the site and new construction of the proposed structure. Id. The application also indicated that "additional hard costs include acquisition that has been completed." Id. PIC then indicated that "[p]roject soft costs include architectural design, permits, engineering, permits, insurance, legal and accounting, management and marketing." Id. And PIC noted that "PIC already owns the building" and "is committing this resource to the project." Id. at 22. In the more detailed budget PIC submitted with its application, PIC summarized the use of funds and distinguished between "Site Assembly," "Project Soft Costs," "Project Construction Costs," and "Developers Fees." Id. at 25. In this summary, PIC indicated that OCS funding would be used only for "Project Soft Costs" and "Project Construction Costs." Id.

In June, 2000, OCS awarded the requested amount for a five-year period running from July 1, 2000 through June 30, 2005. PIC Ex. 4. The grant award included an approved budget that identified no federal funding for personnel, fringe benefits, travel, equipment, supplies, or contractual costs. PIC Ex. 4. Federal funding was specified only for "Facilities/Construction" and "Other." In "Remarks" included in the grant award, OCS states that "Cost under the line item 'Facilities/Construction' are to be used as described in the grantee's application for the following: Facility Purchase Amount $0; Major Renovation Amount $0; and Construction Amount $260,000." By letter dated December 20, 2000, PIC requested a modification of the grant award to permit the "Facilities/Construction" budget to be used for the following costs: Architectural, Demolition, Construction Related Services, Legal, Consultants, District of Columbia Fees, and Salaries and Benefits. PIC Ex. 11. The record contains no indication of written approval from OCS of this request.

In a Semi-Annual Project Progress Report (Progress Report) for the period July 1, 2000 through December 31, 2000, PIC reported total and federal expenditures of $251,009, and indicated that the site had been cleared of all structures in May, 2000. PIC Ex. 18, at unnumbered pp. 11-12. In the Progress Report for the following period, from January 1, 2001 though June 30, 2001, PIC reported expenditures of $92,991 and indicated that it was engaged in construction design, permitting, and marketing activities. PIC specifically indicated that the District of Columbia had reaffirmed a commitment to provide subordinate loan financing. PIC Ex. 18, at p. 6 (numbered as p. 2). By letter dated June 7, 2001, PIC notified OCS that it was running into difficulty in obtaining anticipated funding from other sources. PIC Ex. 17. (In this appeal, PIC submitted additional documentation concerning its dispute with the District of Columbia over promised loan funding and additional issues relating to bank financing. PIC Exs. 12-17.) The Progress Report for the period July 1, 2001 through December 31, 2001 indicated that the District of Columbia was reconsidering prior commitments to participate in funding, but also indicated that the District of Columbia had reaffirmed the commitment to participate in program financing. PIC Ex. 18, at unnumbered p. 2. The report further stated that PIC planned to "Finalize development financing" in the next reporting period, and gave no overall impression of a significant problem. Id.

In March, 2003, PIC submitted two Progress Reports covering periods subsequent to January 1, 2002, both of which indicated that PIC had sold the properties at issue to Howard University in November, 2001, and had terminated the project. PIC Ex. 18, at unnumbered pp. 13-18. In the Progress Report for July 2002 through December  2002, PIC stated: "Due to project funding uncertainty, property was sold to Howard University rather than risk adverse action by pre-development lender." Id. at 17. In briefing, PIC asserted that "[p]roceeds from the sale was [sic] used to pay off loans associated with the project." PIC Motion to Dismiss Disallowances at 6.

By letter dated September 24, 2003, OCS disallowed the entire amount claimed for the Georgia Avenue Development grant because PIC "sold the property ... and in effect, terminated the project." PIC Ex. 1, at 1. OCS asserted that, by doing so, PIC violated a term and condition of the grant agreement requiring that the recipient organization "carry out the project according to the application as approved." Id. PIC timely appealed that disallowance.

Peoples Day Care Center Grant (Grant #090EE445): In May, 1999, PIC applied for $500,000 for the construction of a day care center in a new 9,600 square foot building to be located at 1842-1850 7^th Street, Washington, D.C. PIC Ex. 21. While PIC indicated in the grant application that there were risks of construction delays and problems in obtaining construction financing, PIC stated that "PIC is the owner of the site and is committing this resource to the project." Id. at 23. PIC further indicated that the requested funding "will be used for the construction phase of the project." PIC Ex. 21, at 6. In the more detailed budget PIC submitted, PIC indicated a "PIC Equity Contribution" of $467,000, and distinguished between "construction costs" and "soft costs." Id. at 25.

By letter dated September 14, 1999, OCS awarded $500,000 for a five-year period running from September 30, 1999 through September 29, 2004. PIC Ex. 22. In the grant award, the approved budget indicated federal funding only for "Facilities/Construction," and included no funding for personnel, fringe benefits, travel, equipment, supplies, or contractual costs. Id. In "Remarks" included in the grant award, OCS stated that "Cost under the line item 'Facilities/Construction' are to be used as described in the grantee's application for the following: Facility Purchase Amount $0; Major Renovation Amount $0; and Construction Amount $500,000." PIC submitted a copy of a letter, dated January, 12, 2000, in which PIC requested a modification of the use of the entire amount of OCS funds, so that these funds could be used for: Environmental Services, Architectural Services, Legal Services, Salaries and Fringe Benefits, Insurance and Consultants. PIC Exhibit 25. The record contains no evidence of OCS written approval of this request and OCS denied having any record of receipt of this letter.

In April, 2001, PIC submitted three completed Project Progress Reports for the periods from October, 1, 1999 through March 31, 2001. PIC Ex. 27 at unnumbered 1-8. These reports indicated work on drawings and specifications, engineering, neighborhood surveys, and ongoing engineering studies related to the proximity of underground public transit tunnels. PIC reported expenditures of $105,966 in OCS funds from September 30, 1999 to March 31, 2000, $120,100 from April 1, 2000 to September 30, 2000, and $273,934 from October 1, 2000 to March 31, 2001.

On April 30, 2002, PIC submitted a progress report for the period October 1, 2001 through March 31, 2002 which stated:

During this reporting period, significant increases in the costs related to the construction of the project over the METRO rail tunnel and changes in the financial commitments previously received for the project from private lending institutions were made known to the sponsor. Additionally, changes in the administration of the District of Columbia's community development agency (DHCD) caused the funding commitment for the project to be withdrawn. The aforementioned events along with the inability of the sponsor (PIC) to continue to absorb the costs and expenses of the project during a long protracted development process caused the reconsideration of the overall feasibility of the project. The Board of Directors of PIC, in November, 2001 elected to entertain an offer for the sale of the property to Howard University if no other project alternatives could be identified. In March 2002 the property was sold to Howard University.

PIC Ex. 27 (emphasis in original).

By letter dated September 24, 2003, OCS disallowed the entire amount claimed for the Peoples Day Care Center grant, because PIC "sold the property ... and in effect, terminated the project." PIC Ex. 2, at 1. OCS asserted that, by doing so, PIC violated a term and condition of the grant agreement requiring that the recipient organization "carry out the project according to the application as approved." Id.

Discussion

When a grantee fails to bring a funded project to successful completion, there are often questions about whether the grantee properly spent federal funds. See, e.g., 45 C.F.R. § 74.60-74.73. ⁽¹⁾ Furthermore, when a grantee does not successfully complete a project, greater scrutiny of its claims for federal funding is justified to be sure that claimed costs were reasonable and incurred in good faith. 45 C.F.R. § 74.61. The allowability of specific costs here was governed by Office of Management and Budget (OMB) Circular A-122, "Cost Principles for Nonprofit Organizations." An overarching requirement is that any expenditures must be reasonable for the performance of the award and must be adequately documented. OMB Circular A-122, Att. A, ¶ A.2. The grantee may also be responsible for accounting for the sale or transfer of project assets in its close-out of the unsuccessful project. 45 C.F.R. §§ 74.61(b), 74.71; see also § 74.24(g).

As we discuss below, we conclude that OCS could not properly disallow the total amount awarded for the grants based on PIC's failure to successfully complete the projects, since the grant awards did not contain an express performance guarantee. We also conclude, however, that OCS properly disallowed certain specific claimed expenditures on the ground that they were not consistent with the grantee's representations in the approved grant application or were not supported by adequate documentation. We finally conclude that PIC did not account for its disposition of the real property which it contributed to the projects. We allow PIC an opportunity to provide such an accounting to OCS.

1. Failure of a Project Is Not Sufficient Basis for Disallowance.

In its disallowance letters, OCS stated that, since PIC had failed to complete the projects and sold the properties on which they were to be built, all expenses related to the grants were disallowed. PIC Exs. 1 and 2. PIC asserts that this was not a sufficient basis for disallowance of reasonable and allowable costs incurred by a grantee in a good faith effort to accomplish the project goals. PIC Reply Br. at 5-7.

Prior Board cases have looked to the specific facts and grant terms and conditions in considering whether failure to complete a project justified a disallowance. In Bedford Stuyvesant Restoration Corporation, DAB No. 1404 (1993), for example, the Board upheld a disallowance involving a grantee that failed to achieve the stated goal of three awards under the Community Services Block Grant program. In that case, the Board reviewed grant terms and conditions requiring non-federal matching funds, imposing limitations on the use of grant funds for administrative costs, and establishing a period of availability for the grant funds. Contrary to the interpretation suggested by PIC, neither this case nor others cited by PIC establish any general principle that failure to complete a project can never be a basis for disallowance or that a grant could never be specifically conditioned on performance or outcome requirements.

In line with these cases, we look to the grant terms and conditions at issue here to determine whether funding here was made contingent on performance or outcome. OCS asserts that the grant awards at issue had terms and conditions that should be read as performance or outcome requirements; in particular, OCS relies on the standard term and condition #5, included with both grant awards, that reads: "The recipient organization must carry out the project according to the application as approved by the Administration for Children and Families (ACF), including the proposed work program and any amendments, all of which are incorporated by reference in these terms and conditions."

We do not read this term and condition, or any other in the grant awards, to provide that reimbursement for all costs would be conditional on successful completion of the project. The language does not expressly provide for conditional funding, and OCS did not provide any other contemporaneous documentation to indicate that it was intended to have such a meaning. The language is more reasonably read merely to require that the recipient organization adhere to the representations contained in its grant application. As noted above, moreover, both grant applications discussed potential risks or obstacles that the grantee anticipated in carrying out the project. Implicit in that discussion is the possibility that the project could end in failure. We therefore conclude that failure to complete the projects does not alone demonstrate that the grantee was not carrying out the projects consistent with the representations made in the grant applications.

The failure of the project was not the sole basis, however, for the OCS disallowances. Each disallowance letter stated that the disallowance was based on the failure to carry out the project "according to the application as approved." PIC Exs. 1 and 2. We consider below whether PIC's claims were consistent with the approved grant application in each case.

2. OCS Properly Disallowed Expenditures That Were Inconsistent with the Grant Application.

A. Personnel costs

The "approved budgets" set out in the notices of grant award each included a line item for "Personnel" and "Fringe Benefits" but did not include any funding for such items. Nevertheless, PIC submitted claims for such expenditures in the amount of $82,875 for the Georgia Avenue Project and $207,457.50 for the Peoples Day Care Center Project.

PIC argues that these personnel costs were allowable despite the absence of funding for those line items because applicable regulations permitted PIC to revise its approved budget without prior approval. PIC relies on the regulatory provisions at 45 C.F.R. § 74.25(f), which permit the agency to require prior approval for budget revisions only if "(1) the revision results from changes in the scope or objective of the project or program; (2) the need arises for additional Federal funds to complete the project; or (3) a revision is desired which involves specific costs for which prior written approval requirements apply in keeping with the applicable cost principles." PIC Reply Br. at 3-4, quoting section 74.25(f).

PIC is correct that prior approval may be required only under the listed circumstances. Unless one of those circumstances applies, otherwise allowable costs are not properly disallowed solely for failure to obtain prior written approval. See, e.g., South Plains Community Action Agency, Inc., DAB No. 1639, at 1 (1997) ("Where there is no specific prior approval requirement, a grantee has flexibility to shift costs among budget categories . . . ACF's position here is an example of what the Board long ago observed to be 'an unfortunate tendency toward excessive requirement of advance approvals . . . not supported by statutory or regulatory provision.'" [citation omitted]).

OCS argues, however, that the costs here were covered by subsection 1 of the regulation in that expending grant funds to cover personnel costs amounted to a change in the scope of the projects. OCS Br. at 5-6. OCS argues that OCS could have, but did not, classify personnel and other costs as allowable but instead funded PIC's grant applications only for construction costs. Id. at 6-7. OCS thus sought to hold PIC to the description of its intended expenditures set out in its grant applications. ⁽²⁾ Id.

There were significant differences in the documents setting out the scope of the two grants at issue. In the grant application for the Georgia Avenue Project, PIC submitted a detailed description of "hard" and "soft" costs for which it was requesting funding. In the detailed budget describing such "soft" costs, there was a line item for "project management" in the amount of $10,500. PIC Ex. 3, at 28. Project management is generally a personnel function. Accordingly, in light of this reference, we agree with PIC that personnel costs were within the scope of the federal budget for this project, even though not listed separately in the grant award. ⁽³⁾

In the Peoples Day Care Center Project, by contrast, PIC sought no funding for personnel costs and expressly indicated that it "is not requesting any funds for administrative purposes." PIC Ex. 21, at 5. The grant award contained no reference to personnel, administrative or management costs. The grant award's approved budget included separate line items for personnel and fringe benefit costs which were specified as zero for federal funding. Thus, claiming personnel costs was inconsistent with the express terms of the grant application, as well as the approved federal budget for this grant award. The granting agency may impose prospective limitations on the use of grant funds, as opposed to requiring prior approval to shift funds among categories. See generally Community Action Council for Lexington-Fayette, Inc., DAB No. 1337 (1992). We agree with OCS under these circumstances that shifting federal funds to personnel costs constituted a material change in the scope of the approved project rather than the type of budget revision that does not require prior approval. PIC presented no evidence that it had, in fact, obtained prior approval, as required. Therefore, we uphold the disallowance of personnel costs for the Peoples Day Care Center, in the total amount of $207,457.50.

B. Expenditures for the Georgia Avenue Project incurred and/or paid before the beginning of the project period

OCS identified significant expenditures for the Georgia Avenue Development Project, which the records established as $37,086.12, in which payment was made prior to the July 1, 2000 commencement of the project period set forth in the grant award. OCS Br., Attachment 1. In addition, OCS identified additional expenditures that, although paid during the project period, were based on obligations incurred prior to the commencement of the project period. Id. The record reflects that the latter expenditures amounted to $83,260.41.

Applicable regulations at 45 C.F.R. § 74.28 make clear that funding is available only for "allowable costs resulting from obligations incurred during the funding period and any pre-award costs authorized by the HHS awarding agency." The record contains no such approval for pre-award costs, and PIC does not allege that any approval was granted. The grant award for the Georgia Avenue Development Project contains no express term and condition relating to pre-award costs, ⁽⁴⁾ but generally makes applicable 45 C.F.R. Part 74 and OMB Circular A-122. PIC Ex. 4, at 3 and 5 (standard terms and conditions 1 and 15).

With respect to the disallowance of costs incurred pursuant to contracts that PIC entered into prior to the grant project period, but actually paid within that grant project period, PIC argues that the contract terms for architectural and other services made clear that no duty to pay arose until each "deliverable" was provided by the vendor and, thus, the expense was not incurred until that event. PIC Reply Br. at 9-11. This is consistent with the definition of "obligation" at 45 C.F.R. § 74.2 since the requirement to pay under the contracts did not arise until the services were received. It is also consistent with the indication in the grant applications that the grant projects were ongoing projects. In that context, it is reasonable that PIC would be negotiating and contracting for services for future delivery. Under a cash method accounting system (which the record suggests was what PIC used), the expenditures were properly recognized when payment was made after delivery of the services. ⁽⁵⁾ Thus, the payments would not be pre-award costs simply because they were made pursuant to contracts entered into prior to the project period. While those contracts may have set the terms of the transaction, the obligation to pay arose, and the expense was incurred, only upon delivery of services. The questioned costs in the amount of $83,260.41 were therefore not properly disallowed.

We agree with OCS, however, that one type of claimed expenditure was fully obligated prior to the project period even though paid during the project period. Payments made during the project period in the amount of $1863.61 for late payments by PIC of unpaid 1999 taxes (and interest and penalties) are clearly for obligations incurred well before the project period. See PIC Ex. 20. Such payments are allocable only to the 1999 tax year, and not to the project period. ⁽⁶⁾ We therefore uphold the disallowance of these expenditures.

The analysis is different with respect to expenditures actually paid before the beginning of the project period. PIC provided no indication that payments made prior to the commencement of the project period represented prepayment for work actually performed after the commencement of the project period. Similarly, PIC provided no indication that it prepaid for permits or other governmental fees. We presume that such amounts were paid as due, and represented expenditures unallowable because they were incurred prior to the project period. Thus, we uphold the disallowance of $37,086.12 that represents expenditures paid prior to the commencement of the project period.

C. Other expenditures not documented to be within scope of grant award or grant application

OCS alleges, in summary fashion, that PIC had failed to document that a number of the expenditures were within the scope of the grant award or grant application. OCS Reply Br. at Attachments 1 and 2. PIC provided documentation relating to many of those expenditures before the Board in this appeal, however. OCS's contentions focused not on the adequacy of this documentation, but rather on whether the nature of the costs properly fell within expenditures contemplated as construction costs.

With respect to the Georgia Avenue Development Project, even accepting that PIC may not have established that some of the questioned costs ⁽⁷⁾ directly related to construction, the grant award authorized "other" expenditures in furtherance of the grant project. With respect to the Peoples Day Care Center Project, by contrast, the grant award was restricted to "construction costs." Unlike the Georgia Avenue Project, there was no approved budget for "other" costs. Nevertheless, in the absence of a more specific definition in regulation or agency guidance, we agree generally with PIC that the term "construction" reasonably includes costs that PIC charged to the grant that are generally recognized as necessary to any construction project, i.e., architectural, engineering, and survey costs.

We agree with OCS, however, that the documentation PIC submitted for a few particular expenditures does not appear to establish that the expenditure was related to construction at all. We find the documentation insufficient for two claims for insurance costs. Those claimed expenditures were $6,805 to Travelers for liability insurance, and $5,034 to AEO Insurance for property insurance. PIC Ex. 28. While insurance may well be allowable as a construction-related cost in some circumstances, here PIC failed to document the nature of the coverage obtained or the reasonableness of the amount of the expenditures. As to the AEO claim, no supporting documents were provided at all. As to the Travelers claim an invoice and check were provided that show only the period and property involved. A special condition to the grant required insurance coverage but also required PIC to provide insurance policy documents which do not appear in the record. PIC Ex. 21. We therefore uphold the disallowance of the these expenditures.

Furthermore, we find insufficient the documentation PIC submitted to support a connection between construction activities and the legal fees, totaling $59,655.35, claimed by PIC for the Peoples Daycare project. The record contains no indication of the legal services furnished, or any reason why such substantial legal expenditures were required for facility construction. In sum, neither the documentation nor the general assertions contained in the record persuade us that these costs are properly classified as construction costs even if they were in furtherance of the overall project.

Thus we uphold the disallowance of the amounts claimed for insurance and legal services associated with the Peoples Day Care Center Project, in the aggregate amount of $71,494.35.

3. OCS Properly Disallowed Amounts for Otherwise Allowable Types of Costs in the Absence of Adequate Accounting for Project Real Estate.

In its grant application for each project, PIC expressly indicated that it was the owner of the real property that would be used for the project and that PIC was "committing this resource to the project." PIC Ex. 3, at 22; PIC Ex. 21, at 23. Furthermore, in the budget submissions accompanying its grant applications, PIC indicated that it would be contributing funding to the project represented primarily by the contribution of its equity in the value of the land. PIC Ex. 3, at 25; PIC Ex. 21, at 25. ⁽⁸⁾

The grant awards reflected PIC's representations of a substantial non-federal contribution including a specific mention of the federal contribution as a share of a significantly larger total construction cost. PIC Ex. 4, at 2; PIC Ex. 22, at 4. For example, the grant award for the Georgia Avenue Development Project stated: "The total construction cost will be approximately $1,313,543 of which the federal share will be $345,000." PIC Ex. 4, at 2. Moreover, the grant awards included no federal funds for the purchase of real property, which clearly reflects PIC's representation that it was contributing the real property to the project.

Consistent with these representations that the real property was a project asset, PIC included claims for federal funding for routine maintenance of the property. See PIC Ex. 20 (invoice for services of Mondarve, Inc.) and PIC Ex. 28 (invoice for Leon Hebron). Furthermore, with respect to the Georgia Avenue Development Project, PIC claimed federal funds for property taxes. These maintenance and tax claims are consistent with the treatment of the real property as a project asset that is indicated by the representations in PIC's grant applications.

Notwithstanding these representations that PIC was contributing real property assets to the project, and the claims for maintenance and taxes on such real property assets, PIC did not account for any proceeds from the sale of these assets in its documentation of net allowable expenditures.

PIC argues that it was not required to account for these real property assets on the grounds that such a requirement applies only where there is a federal interest for which a grantee is required to file a "Notice of Federal Interest" pursuant to 45 C.F.R. § 74.37, which, according to PIC, did not apply. That provision requires that grantees file a notice, akin to a lien, indicating limitations on encumbrance without approval of the HHS awarding agency, where real property has been "acquired or constructed or, where applicable, improved with Federal funds." OCS argues that this provision applied because federal construction funds had been spent on the property, even though the property had not been acquired with federal funds and no structures had been constructed. ⁽⁹⁾

Part 74 defines the "Federal share of real property" to mean "acquisition costs and any improvement expenditures paid with Federal funds." 42 C.F.R. § 74.2. OCS acknowledged that no notice of federal interest was required given PIC's assertions that no construction or improvement to the property occurred. OCR Resp. Br. at 4. We agree, however, with OCS that PIC's position that no construction on or improvement to the real property occurred to trigger a federal interest is inconsistent with PIC's claim, which we have accepted above, that many of its expenditures are allowable as construction costs (consistent with the objective of the grant to construct facilities). That at least some of the claimed expenditures were improvements, such as protective fencing and clearing of the land, is apparent on their face. It may be less obvious that other expenditures, such as architectural, engineering, or permitting costs, are effectively improvements. But PIC itself characterized them as "other construction costs" in its grant application for the Peoples Day Care Center. PIC Ex. 21, at 20.

In any case, even if we did not consider these construction costs to effect improvements triggering requirements for a notice of federal interest, it does not follow that PIC did not have to account at all for real property assets contributed to the grant project. The property standards set forth in 45 C.F.R. Part 74 govern all property "whose cost was charged directly to a project supported by an HHS award." 45 C.F.R. § 74.30. PIC expressly indicated that it was contributing its equity in the real property to these projects (valued at $28,791 in the Georgia Avenue Development project and $467,000 in the Peoples Day Care Center project). PIC Ex. 3, at 25; PIC Ex. 21, at 25. The value of that contribution had been included in the non-federal contributions reflected in the discussion of the total projects in the grant awards (although neither grant had a formal requirement for matching funds). PIC Ex. 3, at 4, 15; PIC Ex. 21, at 2, 4, 24, 25. The equity in the real property was thus effectively "charged" to the awards in payment of that promised non-federal contribution. PIC also stated that it had complete control of the property sites and committed property for the development purposes spelled out in the grant applications. PIC Ex. 3, at 14-17, 20, 22; PIC Ex. 21, at 9-10, 15-16, 23.

As such, under 45 C.F.R. § 74.32, real property is required to be used for authorized grant purposes as long as it is needed and, when it is not needed, the recipient "shall request disposition instructions from the HHS awarding agency or its successor." ⁽¹⁰⁾ The awarding agency has some options in authorizing disposition of real property no longer needed but each of those options involves effectively crediting the federal government with "that percentage of the current fair market value of the property attributable to the Federal share in the project." 45 C.F.R. § 74.32(c)(1-3).

It is undisputed that PIC did not seek instructions from OCS upon deciding to dispose of the real property that had been contributed to the two grant projects at issue, and did not credit any share of the fair market value to the federal government. ⁽¹¹⁾

Neither we nor OCS can undo the transaction or turn back the clock. But we believe that OCS is reasonable in disallowing grant funds absent an accounting for the transaction that credits the federal government with an appropriate share of any net proceeds from the sale of real property. The federal interest would be defined as the relative percentage of federal funds in performance of the project. ⁽¹²⁾ To account for the federal interest PIC will need to document both federal and non-federal contributions to the project, and allocate the proceeds of the disposition of the real property accordingly.

Because the record is not fully developed on the issue of the accounting related to the disposition of project assets, we are permitting PIC 60 days from the date of receipt of this decision (or such longer period as OCS permits) to submit an accounting for OCS review. If PIC fails to timely submit any further accounting, we uphold the remaining disallowance at issue here. Absent adequate documentation to the contrary, it is reasonable to assume that the sale of the properties generated profits sufficient to offset the allowable costs. If PIC timely submits such an accounting, OCS shall have 60 days to notify PIC that, for reasons consistent with this decision, the accounting does not support the allowability of the remaining $527,098.42 disallowance at issue here. PIC may appeal to the Board within 30 days of receiving such a notice.

Conclusion

For the reasons discussed above, we uphold the disallowances in the amount of $317,901.58. With respect to the remaining amount disallowed, we permit PIC 60 days to submit an accounting of the disposition of project assets for OCS review. If PIC fails to timely submit any further accounting, the remaining disallowance is upheld without any further action on our part. If PIC timely submits such an accounting, OCS shall have 60 days to notify PIC that, for reasons consistent with this decision, the accounting does not support the allowability of some or all of the remaining $527,098.42 disallowance at issue here. PIC may appeal any such notice to the Board within 30 days of receiving such a notice.

Judith A. Ballard

Donald F. Garrett

Daniel Aibel
Presiding Board Member

1. PIC was on notice through the grant announcements and the grant awards that, as a non-governmental, non-profit grantee, its responsibilities were governed by the regulations at 45 C.F.R. Part 74, which in turn incorporates OMB Circular A-122 to determine the allowability of costs. OCS Resp. Br., Att. A (Decl. of Daphne Weeden ) at ¶ 6, and citations therein; 45 C.F.R. § 74.27.

2. We note that OCS does not contend that any of these costs were unallowable on other grounds, e.g., that they were not reasonable and necessary to the projects or that they were not allocable to the projects.

3. OCS did not question whether the personnel costs were otherwise reasonable, allocable to the project, or properly documented, even where this question was raised to them in oral argument.

4. By contrast, the Peoples Daycare Center grant award specifies that payment of pre-award costs and fees is allowed but only "with approval of the responsible HHS official." See PIC Ex. 22, at 6.

5. Under the definitions at 45 C.F.R. § 74.2, cost "outlays or expenditures" can be reported on either a cash or accrual method. Neither method would permit reimbursement for obligations incurred prior to the funding period without approval for pre-award costs. The distinction is relevant only in determining when a particular cost is expensed - when the charges are incurred or when the payment is issued.

6. We also note that OMB Circular A-122 disallows federal funds for penalties and late fees.

7. In this section, we address only those questioned amounts which were not resolved by earlier sections of this decision.

8. Contribution of the value of the land as a non-federal contribution is consistent with the cost sharing provisions at 45 C.F.R. § 74.23(c).

9. The grant awards also contain a requirement for a Notice of Federal Interest to be filed "at the time of closing." The meaning of that timing requirement is uncertain since no "closing" (in the sense of a settlement of ownership of the property) is contemplated in the grant award. OCS argues in its initial brief that the grant award language should be read to require a notice to be filed without regard to actual construction. PIC responds that such terms must be read consistently with the general regulatory provisions at 45 C.F.R. § 74.37. As noted in the text, OCS appeared to recede from its position in its reply brief. In any case, given the ambiguous language of the grant award, we rely solely on the regulatory language.

10. In this case, there was no determination that the properties were "not needed" for the projects; instead, PIC unilaterally terminated the projects. Thus, arguably, disposition of the property was itself contrary to governing regulations and could be, as OCS argues, a material failure to comply with grant terms and conditions. That said, there is no indication in the current record that PIC acted in an unreasonable or imprudent manner. Nor is there any indication in the current record that OCS would not have approved disposition of the property in accordance with regulations for real property no longer needed.

11. Because of the failure to seek instructions from OCS, PIC deprived OCS of a key option available under the regulation at 45 C.F.R. § 74.32(c)(3); under that provision, the federal government may elect to receive title to the property, or designate a third party to receive title, in return for compensating the grantee for "its attributable percentage of the current market value of the property." Furthermore, PIC deprived OCS of the opportunity under 45 C.F.R. § 74.32(c)(2) to oversee the sales procedures to ensure the "highest possible return."

12. The grant application for the Georgia Avenue Development Project reflects that PIC would contribute the real property subject to a mortgage that would have priority in distribution of the proceeds of any sale. PIC Ex. 3, at 25. In such a circumstance, we read section 74.32(c) to require allocation of proceeds only after satisfaction of mortgage liens. The grant application for the Peoples Day Care project indicates that acquisition costs would be paid from a grant from the Department of Housing and Urban Development. PIC Ex. 22, at 25. It is unclear whether that PIC obtained that grant. Both applications, however, expressly indicate equity contributions by PIC. PIC Ex. 3, at 25; PIC Ex. 22, at 25.