|
|
|
MONTHLY NEWSLETTER: MAY 2008 ISSUE
|
BRIDGING THE GAP
OHIO CHARTER SCHOOL SURMOUNTS AGE, ACHIEVEMENT BARRIERS
BY NICOLE ASHBY
|
|
|
One of the most important strategic decisions that charter school operators will make as a start up or as a continuing entity is the facility decision. Unlike public schools which are provided with a multi-million dollar facility, the charter operator must identify, secure, finance, improve, and maintain their own facility. For educational entrepreneurs, this process can be intimidating due to the negotiation process, legalese, and financing costs.
As a general rule, purchasing a facility with fixed rate debt offers the lowest cost of occupancy for the long term. However, the financing obstacles usually relegate the purchase of a facility to mature charters with increasing enrollments and revenues. Since most charter school operators will start with leasing a facility, an examination of the do’s and don’ts as well as the positives and negatives in negotiation strategy for a facility lease should be required reading.
The first rule of leasing a facility is to pay as little as possible. You want most of your funds to go to education. First, exhaust the possibility of leasing a former public school from the district you are locating in. Several large cities (New York, Chicago, etc.) will actually lease some of their vacant school facilities to a charter school for almost nothing. If the public school takeover scenario is not possible, the next best option for a lease is a facility owned by another municipal entity, which can be converted to suit your needs. Even though your charter school may have 501(c)(3), non-profit status, a lease with a for-profit entity may require the charter school to reimburse the for-profit entity for real estate taxes, which could be a significant cost. So, exhaust the non-profit partnership first.
Once you have found a facility which can be made to suit the needs of your school, you will start to negotiate the terms of a lease with your prospective landlord (“lessor”). Do your homework. Find out the rental history of the facility. How long has it been vacant? How high is the vacancy rate in the area? What are other similar facilities renting for? The more knowledge you have, the better deal you can negotiate. Furthermore, the lessor must qualify the site as being zoned properly for your use. You must qualify the site as meeting the parking needs of your staff and allows for easy and safe ingress and egress for student drop-off, pick-up and bus entry.
A lease starts with the naming of the entities entering into the agreement. You may want to consult your legal advisor to see if there is an advantage to having an affiliated limited liability corporation or “LLC” be the lessee and having that entity sub-lease to the school. The lease will contain “recitals” which will describe the intent of the parties and describe the premise you are leasing. Be sure that the description of the premises reflects your understanding of what you are leasing. The “term” of the lease usually has a significant impact on the balance of negotiations of the lease. The lessor wants the longest possible term, while the lessee wants the term co-terminus with the charter life. If you sign for a longer lease, the landlord should offer more incentives via a larger build-out allowance or more free rent (Note: if you get a significant period of free rent and you are doing your accounting by GAAP, you should amortize the free rent over the life of the initial term of the lease). If you believe that the facility could be a long term solution for your school, you may want to try to get a purchase option into the lease.
Always negotiate an assignment/sub-lease clause into your lease. It will give you options should you need to get out of the facility prior to the end of the term. An assignment is usually preferable to a sub-lease, as an assignment obligates a new tenant to take the total responsibility of the balance of the term of the lease. A sub-lease may leave financial liability with you.
The “base rent” is usually the cost to you for the square footage you are leasing, expressed in terms of a monthly amount. If you have agreed to a base rent on a per square foot basis, you may want to have an outside third-party measure the space. A few feet difference could be a significant amount over a long lease term.
“Additional rent” is the term that encompasses recoverable and other expenses, fees, and assessments. The landlord will want to recover the expenses of operating the facility, any taxes or assessments that are imposed on the facility, repairs, and insurance coverage costs on the property. The items of operating expenses that you want to contain or eliminate would be items that should be capitalized costs and management fees. Also, be careful before agreeing to insurance clauses that require liability coverage that is far beyond what your own insurance carrier has recommended. The higher the coverage on liability insurance can push up the costs of “additional rent” by a significant factor.
Somewhere in the lease, there will be at least two pages devoted to “Hazardous Materials” or “Environmental Contamination.” Due to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) and subsequent, smaller laws that have been enacted since, the consequences of being found liable for hazardous contamination can be financially disastrous. You only want to agree that while you occupy the facility, that you will not release any hazardous material, etc., but that you will not accept responsibility for any previous contamination.
Finally, even after reading all the do’s and don’ts in this article, you should still have your lease reviewed by a competent real estate attorney prior to signing on the dotted line.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Source:For information contact Al Dubin, Lighthouse Facilities Management, LLC
Phone: 508.626.0901 Email: adubin@lighthouse-facilities.org
|
|
|
