Authors: Julie Mebane, Partner (Real Estate) and Katherine Brodie, Partner (Higher Education)
Nothing is more unwelcome than a big surprise after your institution has invested hours and dollars in a new instructional location. Up front due diligence is essential, and it needs to identify issues that may impair your ability to operate at a new location or expose the institution to significant liabilities. Be sure to consider the following and utilize counsel well versed in college and university property acquisitions and applicable regulations to examine any problems you may encounter:
- What is the zoning of the property? Is there a zoning report that can be reviewed (if not, consider ordering one)? Does the property have the number of parking spaces required by law or local ordinances?
- Are there any CC&Rs (covenants, conditions and restrictions) recorded against the property? Get and review copies to make sure they don’t prohibit any intended uses.
- Is there a conditional use permit (CUP) or planned development permit affecting the property? If so, review this for any use restrictions.
- What is the current condition of the property and the physical plant? Check for current building permits, and consider getting a professional inspection report on the building’s systems.
- Does the current owner have a title policy covering the property? Important information about the location and its history can be gained from this document.
- Does the owner have a Phase 1 environmental assessment regarding any hazardous materials at the location? Request and review this for possible issues, and keep it as a baseline in case of future problems.
- Are there any litigation or condemnation actions that have been filed relating to the property? These can be red flags for any future owner or occupant.
- Is the property in a designated flood zone, near an earthquake fault line, or otherwise located in an area exposed to natural disasters? Natural hazard disclosure reports can be obtained without much expense.
- Was the property previously used by an institution participating in U.S. Department of Education Title IV federal student aid programs and did that institution close with unpaid liabilities owed to the Department? If so, moving into that space by lease or purchase could expose your institution to assumption of the unpaid liabilities of the previous owner.
- Do you know your state, accreditor and Department of Education reporting obligations? These agencies must generally be notified of any change of location or any new space where more than 50% of an eduational program will be offered, or the institution risks liability for all Title IV funds disbursed to students at the new location and potentially other regulatory sanctions.
Most of these questions can be answered with the help of a forthcoming landlord when negotiating a new lease and with the assistance of experienced counsel. If the property is being purchased, the seller is likely required by law to make certain representations and warranties and to disclose property-related information and materials during the buyer’s due diligence period.
So don’t be surprised – get the information you need before you commit to a new campus or instructional location.
On June 3, 2019, the U.S. Department of Education issued a Q&A document regarding compliance with the BDR Rule that confirmed that the reporting requirements for certain “triggering” events will be enforced at all institutions, including public colleges and universities. This information supplements the Department’s March 15, 2019, guidance regarding the 2016 BDR Rule.
The Department’s Q&A makes clear that public institutions are required to report, pursuant to 34 C.F.R. 668.171(h), the following events within the stated time periods:
- Borrower-defense-related lawsuits brought by a federal or state authority: within 10 days after the institution is served with the complaint and then again within 10 days after the suit has been pending for 120 days.
- All other lawsuits: within 10 days after the institution is served with a complaint, then again within 10 days after the court sets certain deadlines relating to motions for summary judgment (MSJ) or disposition, and then a third time within 10 days after certain events relating to an MSJ or dispositive motion occur.
- Any debt or liability arising from a final judgment in a judicial or administrative proceeding: within 10 days after a payment was required or the liability was incurred.
- Any settlement, including settlements reached prior to the initiation of a formal legal proceeding: within 10 days after a payment was required or a liability was incurred.
To read the full text of this Alert, please visit the Duane Morris website.