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Colorado League of Charter Schools2015 Colorado Charter Schools ConferenceFebruary 26, 2015

Leasing Facilities for Today’s Students and Tomorrow’s Leaders


Presenters

Kwali M. FarbesDenver ^ [email protected]

Erich T. KennedyDenver ^ [email protected]


We will be covering . . .

• Occupancy Lease versus “Finance Lease”.

• Finance Lease Distinctions.

• Facilities Options with the District.

• Selected Issues, Implications, and Opportunities for Charter Schools.


The Occupancy Lease

Landlord

Charter School

Premises

1. Landlord owns the Premises.2. Landlord leases the

Premises to the School . . . 3. . . . in exchange for Rent.4. Pursuant to a Lease.

Lease

$$ - Rent


The Occupancy Lease

There are multiple issues for consideration, including the following, to name a few:

• Premises (and Acceptance thereof), Term, Renewal, Rental (Triple Net; CPI Adjustments), Use, Quiet Enjoyment, Security Deposit, Services, Alterations, Insurance, Assignment/Subletting, Indemnification, Covenants Not to Sue, Subordination/Attornment, Signage, Parking, Etc.


The Occupancy Lease

Selected Issues and Implications.

• Premises.

• How is Premises defined? Does it cover all of the property the Charter School needs to operate?

• Implications of single-tenant vs. multi-tenant space.

• Tenant Improvement.

• Appurtenances.


The Occupancy Lease


• Acceptance.

• The walk-through.

• Acceptance of Premises, not building, if multi-tenant.

• Exclude punch-list items and latent defects.


The Occupancy Lease


• Term.

• Term of years.

• Delay in commencement.

• Renewal terms and procedures for renewal.


The Occupancy Lease


• Rent.

• Base rent.

• CPI Adjustments.

• Additional rent (i.e., Triple Net).


The Occupancy Lease


• Use.

• Ensure that the Lease permits the Charter School to use the Premises as a school.

• “Any lawful use.”

• Environmental compliance.


The Occupancy Lease


• Tenant Improvements.

• Scope of Work.

• Landlord/Tenant Responsibility.

• Payment.

• Timing.


The Occupancy Lease


• Services.

• What services will the Landlord provide, and when? Janitorial, security, etc.

• Rent abatement.

• Heating and air conditioning.


The Occupancy Lease


• Alterations and Repairs.

• What alterations can the Charter School make with and without Landlord approval?

• Who is responsible for repairs?


The Occupancy Lease


• Insurance.

• What does the Landlord provide/pay for (or pass thru in Triple Net)?

• What does the Charter School provide/pay for?

• Minimum coverage.


The Occupancy Lease


• Assignment and Subletting.

• Can the Charter School assign or sublet?

• Does the Charter School want the ability to allow outside groups to use the building during after-school hours?


The Occupancy Lease


• Parking.

• Signage.

• Cabling and Wireless Technologies.

• Access (for students, loading docks, etc.).

• Rules and Regulations.

• Rights of First Refusal/First Offer.

• Lease Recordation.


The Occupancy Lease


• What happens at the expiration of the Lease?

• The Charter School vacates and surrenders the Premises.


The Occupancy Lease


• Why the Occupancy Lease?

• Financial Considerations.

• Start-up Phase.

• Location Flexibility.


“Finance” Leases Two Structures.

• Structure A – The Lease that Operates as a Loan to the Charter School (utilizing a Building Corp).

• Structure B – The Lease that Operates as an Investment for a third party Developer (with Purchase Option).


“Finance” Leases (Structure A – Taxable)

Charter School

Building Corp

Property

Lender

1. Building Corp owns the Property.2. Building Corp leases the Property to the

Charter School in exchange for Rent pursuant to a Lease.

3. Lender makes a loan to Building Corp in exchange for a Promissory Note.

4. Rent under Lease = Debt Service under the Note.

Lease

$$ - Rent

$$ - Loan

$$ - Debt Service


“Finance” Leases (Structure A – Tax Exempt)

Charter School

Building Corp

Property

BondownersIssuer

Lease

$$ - Rent

Bonds

$$$$

Note

*Bondowner could be a commercial bank.


“Finance” Leases (Structure A)


• Why the Building Corp/Lease structure?

• The Charter School isn’t permitted to mortgage the Property under Colorado law.

• Note that the Building Corp is a nonprofit corporation and often affiliated with the Charter School via overlapping board members. It may also be a tax-exempt organization.




• Why the Issuer?

• Under current law, a Charter School cannot issue its own tax-exempt debt.

• The Issuer (e.g., Colorado Educational and Cultural Facilities Authority) can issue tax-exempt debt.




• Lender/Bondowners are concerned that the deal is a good credit.

• Considerations for Lender/Bondowners: financial strength/performance of the Charter School, enrollment, loan-to-value, test scores, senior management, board composition, construction management, etc.

• The Lease will address matters similar to the Occupancy Lease, but the Lease functions primarily as a loan. As such, some of the Lease terms will be similar to a loan (e.g., reporting and financial covenants).




• What happens at the end of the Lease?

• The Charter School has the right to purchase the Property at agreed upon price (nominal to less than FMV).

• Installment sale treatment required for tax purposes.


“Finance” Leases (Structure B)

Building Corp

Developer

Property

Bank

1. Developer owns (or will purchase) the Property.

2. Developer leases the Property to Building Corp, which sublets to the Charter School (not shown above).

3. Bank makes a loan to Developer for acquisition/construction.

4. Rent under Lease sufficient to cover Debt Service plus Developer compensation (e.g., 120%).

Lease

$$ - Rent

$$ - Debt Service

$$ - Loan




• The Lease typically contemplates construction/renovation of existing space.

• Note that the Developer is likely a for profit entity and isn’t affiliated or necessarily a “friend”. The relationship is generally commercial and arms-length.




• Developer is concerned that the deal is a good investment (ability to cover debt service, appreciation in the Property, market/sales price if Purchase Option isn’t exercised).

• As such, the Developer will also be concerned with the financial strength/performance of the Charter School, enrollment, etc.




• The Lease will address most of the issues addressed in the Occupancy Lease, but there will also be a Purchase Option.

• If the Charter School does not exercise its Purchase Option, then it must surrender the Property at expiration of the Lease, and the Developer retains ownership of the Property.




• Option to Purchase the Property.

• Purchaser Price – Key Consideration.

• How will the Charter School pay the Purchase Price? It could use a Finance Lease (Structure A).

• Knowing the Property/Due Diligence.

• Mechanics.




• Other Important Terms and Conditions.

• Sublet by Building Corp to the Charter School.

• Developer Fee.




• Why this structure?

• Can be a “stepping stone” for a Charter School that needs more, customized space but isn’t ready for Structure A.

• Provides greater flexibility than Structure A at Lease expiration (i.e., the ability to move to different facilities).

• Working with a Developer that understands Charter Schools and its needs in a facility.


Facilities Options with the District


• Use of District facilities.

• By agreement.

• No Building Corp required.

• Bond issuance by the District to fund acquisition/construction/renovation of Charter School facilities.


Key Takeaways

• Consider the financial position and phase of the Charter School.

• Know your Lease and the Charter School’s rights/obligations as they relate to:

• Use of the Premises/Property.

• Finances (including the Purchase Option).

• Get good financial/legal advice. These transactions aren’t simple and they include a number of nuanced issues for Charter Schools.


Questions?

Kwali FarbesDenver ^ [email protected]

Erich T. KennedyDenver ^ [email protected]

Mary GrovesDenver ^ [email protected]

Darren McHughDenver ^ [email protected]

© 2013 dinsmore & shohl | legal counsel | colorado league of charter schools 2015 colorado...

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