Due to the outbreak of coronavirus (COVID-19), the Centers for Disease Control and Prevention recommends that institutions of higher education consider postponing or canceling upcoming study abroad or foreign exchange programs. However, this advice has raised pressing questions about how this would affect Title IV, Higher Education Act (HEA) federal financial aid and a student’s ability to finish the term if a program is interrupted or canceled. In response, on March 5, 2020, the U.S. Department of Education’s office of Federal Student Aid (FSA) offered guidance permitting temporary flexibility and clarifying how higher education institutions can continue to comply with Title IV regulations for students whose activities are impacted by COVID-19.
Lease Points Colleges and Universities Should Not Miss
DO NOT BE FOOLED BY “STANDARD FORM LEASES” and
BEWARE OF CHANGING RULE ON TREATMENT OF LEASES IN TITLE IV COMPOSITE SCORE
There is no such thing as a “standard lease,” even if the document has that title at the top.
Julie Mebane, Partner (Real Estate), Duane Morris LLP
If your institution is reviewing a lease form and you are considering signing it for the tenant, make sure that you don’t gloss over it in the belief that its terms cannot be negotiated. Usually, many lease terms can be modified and the tenant’s position can be enhanced if you pay attention to its language, especially a few important provisions:
- Consider starting out by having both landlord and tenant sign a term sheet with the key business points summarized. This can avoid confusion and disagreements later when the lease is reduced to writing.
- Pay close attention to the description of the leased premises. Make sure that the location and the number of rentable square feet are included and accurate, and consider including a space plan as an exhibit.
- Double-check the rent calculations in the lease. With regard to periodic rent increases, you may want to include a chart that summarizes the timing and amount of rent increases, rather than just a description like “3% rent escalations per year.”
- If the tenant will be paying operating expenses as part of its rent, consider negotiating a cap on the amount of annual increases that can be passed through to the tenant.
- Ask the landlord to pre-approve and describe in the lease any up-front alterations or other work of improvements the tenant needs to do on the premises.
- In the use clause, more general language benefits the tenant. Try to include the right to conduct “office and other administrative uses” or possibly “all other lawful uses.” You may enhance the tenant’s right to assign and sublet in the future by broadening the use clause.
- With regard to the parties’ respective maintenance and repair obligations, be sure there is a complete description of the landlord’s duties. Try to include structural maintenance and repairs, floors, ceilings, roofs, windows, HVAC and building systems, interior plumbing and wiring in the landlord’s list.
- Get a representation from the landlord that the premises and the property are in compliance with applicable laws and in good operating condition and repair as of the commencement date.
- Try to negotiate the surrender language so the tenant does not need to remove all of the tenant improvements, cabling and furniture, fixtures and equipment at the end of the term.
- Beware of leased spaces formerly occupied by Title IV institutions. See our [date] blog post on that subject.
These provisions of a lease, and many others, can usually be negotiated and improved for the tenant. Don’t consider any lease, even a pre-printed form that says it’s “standard,” to be carved in stone.
New and Extended Lease Rules Are Changing for Title IV Composite Score Purposes
Katherine Brodie, Partner (Education), Duane Morris LLP
On September 23, 2019, the U.S. Department of Education published a Final Rule that applies to all higher education institutions that participate in the federal student financial aid programs under Title IV of the Higher Education Act (“Title IV programs”).
Specifically, the Final Rule amends the annual Title IV financial responsibility composite score to take into account the Financial Accounting Standards Board (FASB) Accounting Standard Update (ASU) 2016-2, which requires that leases be treated as both right-of-use assets and liabilities. Public entities must adopt 2016-2 for leases entered into after fiscal years starting on or after December 15, 2018. Private entities must adopt the new standard starting January 1, 2020. FASB, however, has proposed delaying the private entity implementation date to January 1, 2021.
The Department of Education’s Final Rule exempts all leases entered into before December 15, 2018 from application of 2016-2 for composite score purposes. For leases entered into on or after December 15, 2018 (which the Department states can include extensions or modifications of pre-December 15, 2018 leases), auditors must apply FASB ASU 2016-2 and, as a result, some institutions’ composite scores may be adversely impacted. Since FASB ASU 2016-2 does not subject private entities to the new standard until at least January 1, 2020, there is an argument that the Department should not have an institution’s official composite score calculation reflect the new lease accounting standards until such time as the new standard is required under GAAP, but the Department has not yet clarified its position on this point (despite several pending requests for clarity on that point). Bottom line, as institutions negotiate new leases or seek to extend or modify current leases, they should consult Title IV counsel and their auditors for guidance because certain lease terms may significantly impact the carrying value of a leased asset under the new FASB standard as applied by the Department of Education.
Avoiding Land Mines: Do Your Homework on that New Campus or Instructional Location
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.
Clery Act Compliance: October 1 Deadline for Colleges and Universities to Complete and Distribute Annual Security Report Is Fast Approaching
The Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act, or Clery Act, 20 U.S.C. § 1092(f) (34 C.F.R. § 668.46), requires all schools, colleges and universities that participate in federal student financial aid programs to:
- Maintain and disclose to the public statistics, policies and programs about certain crimes occurring on and/or near a campus; and
- Have in place and be able to demonstrate implementation of specific campus safety policies, including those related to crimes of sexual violence.
Educational institutions must provide and distribute this information in a Clery Act Annual Security Report (ASR) by October 1, 2019. The U.S. Department of Education guidance specifies that this is a firm deadline; there is no grace period and no exemptions exist.
Critical Compliance Areas for Online Schools as 2016 State Authorization Rule Takes Effect
The U.S. Department of Education on July 22, 2019, clarified that the 2016 State Authorization Rule, which applies to online educational programs offered across state borders, among other topics, is undoubtedly now in effect. As this Alert explains, there are significant and immediate consequences for schools deemed to be noncompliant, even if through no fault of their own.
Here are the top three things schools need to know…