Business and Legal Issues in Developing Vacant Land and

Underutilized Existing Buildings

Jeffrey G. Wright

Nixon Peabody LLP

June 28, 2007

Phases of Development Process

a) Planning

b) Development

c) Financing

d) Construction

e) Operations

Planning Phase- Formulation of Development Plan

(a) Development Objectives

(i) Part of educational mission of institution

(A) Construction of new buildings; expansion or renovation of existing buildings on campus.

(ii) Ancillary to educational mission

(A) Student, faculty and/or staff housing on or near campus

(B) Parking facilities

(C) Infrastructure

Planning Phase- Formulation of Development Plan (cont’d)

(iii) Tangential to educational mission

(A) Senior housing targeted to alumni

(B) Retail, food service and entertainment

(C) Research and development spinoffs

(iv) Unrelated to educational mission

For profit development for sale or lease

Planning Phase- Formulation of Development Plan (cont’d)

(b) Other Planning Considerations

(i) Maximize return by realizing highest price or rent obtainable.

(ii) Maintain control of ownership, use, management, design and/or occupancy.

(iii) No impact on balance sheet.

Planning Phase- Formulation of Development Plan (cont’d)

(c) Planning scope of project

(i) Site identification – location, area and physical characteristics of land or building to be developed

(ii) “Market” assessment

(iii) Financial feasibility

(iv) Financing plan

(v) Ownership structure

(vi) Required approvals

(vii) Development consultant and/or financial advisor

(viii) Task list and time line

Financing Plan

(A) Identify alternate sources of financing

(B) Identify sources of start-up capital

(C) Identify alternative financing mechanisms

(D) Determine optimal financing structure

Ownership Structure-Tax, Accounting and Financing Considerations

(A) Property Ownership

(i) Existing land

(ii) Acquire by purchase

(ii) Ground lease

(iv) Building or space lease

Ownership Structure-Tax, Accounting and Financing Considerations (cont’d)

(B) Ownership Entity

(i) Institution itself

(ii) Affiliate of Institution, typically single purpose entity that may be controlled by Institution

(iii) 501(c)(3) corporation or single member LLC

(iv) Joint venture with developer

(v) Unrelated third party

Zoning and other regulatory approvals

(A) Rezoning, special permits, variances

(B) Environmental

(C) State regulatory approvals

Development Phase - Implementation of development plan by satisfaction of preconditions to commencement of

construction

(a) Establishment of ownership entity

(i) Prepare and file certificate of incorporation, partnership agreement, limited liability company operating agreement or joint venture agreement.

(ii) Qualify under Section 501(c)(3) of IRC

(b) Obtain site control- Negotiate purchase and sale agreement ground lease, building lease or space lease

(c) Negotiate contracts with consultants

(i) Predevelopment agreement and/or development agreement

(ii) Marketing agreement

(iii) Management agreement

(d) Negotiate architect’s agreement

(e) Negotiate construction contract or construction management agreement

(f) Obtain state regulatory approvals

(g) Obtain land use approvals

(h) Obtain environmental inspection and audit report

Development Phase (continued)

Financing Phase-Implementation of Development Plan by Satisfaction of Pre-

Conditions to Financing Closing(Overlap with Development Phase)

(a) Negotiate financing commitment

(b) Negotiate financing documents

(c) Adopt authorizing resolutions

(d) Due diligence investigation

(e) Preparation of disclosure materials

(f) Obtain title report and survey

(g) Satisfy equity requirement

(h) Legal opinion

(i) Financing closing

Construction Phase

(a) Requisition procedure – roles of design architect, general contractor, inspecting architect and Institution.

(b) Change orders – keeping project costs under control

(i) Unforeseen conditions

(ii) Elective changes

(iii) Contingency

Construction Phase (Continued)

(c) Construction progress schedule — completing the project on time

(i) Liquidated damages

(ii) Force majeure events

(iii) Retainage

(d) Construction Disputes

(i) Mechanics’ liens

(ii) Payment and performance bonds

(e) Certificate of Occupancy

Operations Phase(a) Marketing

(b) Management

(c) Financial covenants

(i) Marketing targets

(ii) Occupancy targets

(iii) Operating ratio

(iv) Debt service coverage ratio

(v) Days cash on hand

(d) Obligation to appoint new marketing agent or manager

(e) Achievement of stabilized occupancy.