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© 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com Colorado League of Charter Schools 2015 Colorado Charter Schools Conference February 26, 2015.

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Presentation on theme: "© 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com Colorado League of Charter Schools 2015 Colorado Charter Schools Conference February 26, 2015."— Presentation transcript:

1 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com Colorado League of Charter Schools 2015 Colorado Charter Schools Conference February 26, 2015 Leasing Facilities for Today’s Students and Tomorrow’s Leaders

2 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com Presenters Kwali M. Farbes Denver ^ 303-296-3996 kwali.farbes@dinsmore.com Erich T. Kennedy Denver ^ 303-296-3996 erich.kennedy@dinsmore.com

3 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com 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.

4 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com 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

5 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com 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.

6 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com 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.

7 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com The Occupancy Lease Selected Issues and Implications. Acceptance. The walk-through. Acceptance of Premises, not building, if multi- tenant. Exclude punch-list items and latent defects.

8 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com The Occupancy Lease Selected Issues and Implications. Term. Term of years. Delay in commencement. Renewal terms and procedures for renewal.

9 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com The Occupancy Lease Selected Issues and Implications. Rent. Base rent. CPI Adjustments. Additional rent (i.e., Triple Net).

10 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com The Occupancy Lease Selected Issues and Implications. Use. Ensure that the Lease permits the Charter School to use the Premises as a school. “Any lawful use.” Environmental compliance.

11 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com The Occupancy Lease Selected Issues and Implications. Tenant Improvements. Scope of Work. Landlord/Tenant Responsibility. Payment. Timing.

12 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com The Occupancy Lease Selected Issues and Implications. Services. What services will the Landlord provide, and when? Janitorial, security, etc. Rent abatement. Heating and air conditioning.

13 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com The Occupancy Lease Selected Issues and Implications. Alterations and Repairs. What alterations can the Charter School make with and without Landlord approval? Who is responsible for repairs?

14 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com The Occupancy Lease Selected Issues and Implications. Insurance. What does the Landlord provide/pay for (or pass thru in Triple Net)? What does the Charter School provide/pay for? Minimum coverage.

15 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com The Occupancy Lease Selected Issues and Implications. 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?

16 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com The Occupancy Lease Selected Issues and Implications. Parking. Signage. Cabling and Wireless Technologies. Access (for students, loading docks, etc.). Rules and Regulations. Rights of First Refusal/First Offer. Lease Recordation.

17 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com The Occupancy Lease Selected Issues and Implications. What happens at the expiration of the Lease? The Charter School vacates and surrenders the Premises.

18 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com The Occupancy Lease Selected Issues and Implications. Why the Occupancy Lease? Financial Considerations. Start-up Phase. Location Flexibility.

19 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “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).

20 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “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

21 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “Finance” Leases (Structure A – Tax Exempt) Charter School Building Corp Property BondownersIssuer Lease $$ - Rent Bonds $$ Note *Bondowner could be a commercial bank.

22 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “Finance” Leases (Structure A) Selected Issues and Implications. 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.

23 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “Finance” Leases (Structure A) Selected Issues and Implications. 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.

24 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “Finance” Leases (Structure A) Selected Issues and Implications. 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).

25 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “Finance” Leases (Structure A) Selected Issues and Implications. 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.

26 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “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

27 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “Finance” Leases (Structure B) Selected Issues and Implications. 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.

28 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “Finance” Leases (Structure B) Selected Issues and Implications. 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.

29 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “Finance” Leases (Structure B) Selected Issues and Implications. 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.

30 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “Finance” Leases (Structure B) Selected Issues and Implications. 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.

31 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “Finance” Leases (Structure B) Selected Issues and Implications. Other Important Terms and Conditions. Sublet by Building Corp to the Charter School. Developer Fee.

32 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com “Finance” Leases (Structure B) Selected Issues and Implications. 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.

33 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com Facilities Options with the District Selected Issues and Implications. Use of District facilities. By agreement. No Building Corp required. Bond issuance by the District to fund acquisition/construction/renovation of Charter School facilities.

34 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com 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.

35 © 2013 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com Questions? Kwali Farbes Denver ^ 303-296-3996 kwali.farbes@dinsmore.com Erich T. Kennedy Denver ^ 303-296-3996 erich.kennedy@dinsmore.com Mary Groves Denver ^ 303-296-3996 mary.groves@dinsmore.com Darren McHugh Denver^ 303-296-3996 darren.mchugh@dinsmore.com


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