Written by: Bethany A. Bartlett
As the warm weather approaches, we see the usual signs of spring which, in a good year, includes an increase in commercial development and corresponding financing transactions. Most notably this year is the increase in financing requests for solar projects, including construction, permanent, bridge and mini-permanent loan options. Below is a list of tips we have assembled to make your solar project more readily financeable.
- Underlying Real Estate. Most lenders will request a mortgage on the underlying real estate where the solar array is located. If the fee in the land is also owned by the project owner then a first priority mortgage will be recorded against the land. Many times, however, the project is located on property owned by a third party and ground leased to the borrower. In this scenario, the lender will request the borrower grant a leasehold mortgage, which will require a notice of lease to be filed at the registry, if not already of record. The lender will also look for certain mortgagee protections in the ground lease including: (i) the right, but not the obligation, to cure any borrower default after notice and any applicable cure periods; (ii) that the lease can be collaterally assigned and/or a mortgage granted without ground lessor’s consent; and, (iii) the obligation of any holder of a fee mortgage on ground lessor’s property to enter into a non-disturbance agreement with the tenant/borrower should the ground lessor ever be foreclosed upon. When negotiating a ground lease for a solar project, these provisions should be negotiated up front and included in the form of lease to avoid the tenant/borrower having to obtain a written consent or amendment from the ground lessor when trying to obtain financing.
- Zoning. A lender will want assurance that the project has received all of its required permits from the municipality and proof each is recorded in the chain of title, as so required. Some developers/borrowers use a local permitting counsel for this process and will ask for a zoning opinion to be provided to the lender, affirmatively stating the project has received all such required permits. In lieu of an opinion, a borrower could obtain a certificate from an engineer associated with the project that all permits have been obtained and the project is or will be built in accordance therewith. A zoning endorsement from the title company may also satisfy this requirement, but the title company will need to rely on a third party zoning record search or some other evidence of zoning data. If a project is fully constructed, some municipalities have issued a Certificate of Occupancy (despite no “occupancy” will actually take place) stating the project and the use are in compliance with local zoning bylaws and issued project permits.
- Power Purchase Agreement. Prior to entering into a financing arrangement, a lender will require that the project owner has entered into a fully executed power purchase agreement with a third party to purchase the power generated by the project. A lender will confirm the executed agreement contains the following provisions: (i) it may be collaterally assigned by right in order to obtain lender financing (if that is not the case, then a written consent of the power purchaser will be needed for closing); (ii) the term (typically 20 to 30 years) is longer than the full amortization period of the loan; and (iii) should the lender foreclose or otherwise take over the project with a new operator, the power purchase agreement will remain in place.
- Engineering, Procurement and Construction Contracts (“EPC”). A lender and its engineering consultant will review the EPC along with the credentials of the construction contractor and any known subcontractors. If the financing is for a construction loan, the lender will confirm the timing and requirements for draws and forms of lien waivers set forth in the EPC are consistent with the loan disbursement schedule and the lender’s requirements. Often the EPC will also include a production guarantee and warranties; therefore, the EPC should also contain language allowing a collateral assignment for financing without consent of the contractor.
- Solar Renewable Energy Certificates (“SRECs”). Once the solar array is constructed and has achieved its commercial operation date, the Statement of Qualification from the Massachusetts Department of Energy Resources evidencing the project is eligible to participate in the Solar Credit Clearinghouse Auction must be provided to lender. Each interconnection agreement for the project is given a specific corresponding identification number and each time 1MWh of energy production is achieved, an SREC is created. The SREC is “minted” and deposited quarterly into the project’s account. An annual auction at the end of July is held to sell the SRECs. Lenders will often structure repayment of their loans using quarterly interest payments and annual principal payments to match the cash flow of a solar project which is based on the SREC time table.
- Section 1603 Grant Funds. As part of the American Recovery and Reinvestment Act of 2009, federal grants were made available for a portion of the costs associated with installing solar projects. This program is only available for projects that submitted an application before October 1, 2012 and for which at least 5% of project costs were spent before that date. While new projects are no longer eligible (they do remain eligible for Federal Investment Tax Credits) , a number of projects still under construction, that met the listed requirements, are grandfathered under the program. The grant funds are received once the project has achieved its commercial operation date. Lenders may provide interim bridge financing during the construction of the project based on evidence of an awarded grant. The bridge loan will then be repaid in full upon receipt of the grant proceeds, such receipt may be assigned directly to the lender at its request.
- Reserve Accounts. Often a lender will require a debt service reserve account to be funded at closing, which is tied to a dollar amount consistent with a certain number of months of debt service payments, in case there is a period of low energy generation production or lag in the sale of SRECs, which may present an issue in meeting required payment provisions.
A lender will also look for either an extended warranty for the solar inverters (which convert the solar power into useable electricity on the grid) which extends through the term of its loan or will require an annual payment to a blocked reserve account held with the lender to ensure funds will be available at the end of the estimated useful life of the inverters to purchase replacements.
Bethany A. Bartlett is a Partner in the firm's Real Estate Department.
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Written by: Paula G. Curry
Imagine you’ve just purchased your dream home in the ‘burbs. Your patio has just been finished. Your beautiful 2-acre lot, the minimum size required by the zoning bylaw, is taking shape – the grass is weed-free, the flowers are in bloom. You whistle a happy tune as you fetch the mail from the box at the end of the drive, but your mood quickly shifts as you read the notice addressed to you as the potential abutter of a huge ground-mounted solar array. Can they do that in a residential area?
Depending on where you live, the answer could be “yes.” Massachusetts law provides that “no zoning ordinance or by-law shall prohibit or unreasonably regulate the installation of solar energy systems or the building of structures that facilitate the collection of solar energy, except where necessary to protect public health, safety or welfare.” No court has yet interpreted this language, but the Commonwealth’s Department of Energy and Environmental Affairs (“EEA”) takes the position that, in communities where no zoning bylaw regulating solar facilities exists, solar projects – even large scale ones -- are allowed as of right anywhere in town, subject only to the issuance of a building permit. Needless to say, this law has created controversy, as a recent Boston Globe article points out, where proponents seek to install what many view as industrial projects in residential areas. http://holliston-hopkinton.patch.com/articles/letter-bullard-solar-zoning-would-harm-residents
Partly in an effort to control where solar projects are sited, and partly in an effort to meet the criteria for a “Green Community” under the Green Communities Act, municipalities such as Salisbury, Arlington, Dedham, Monson and Tyngsboro, among others, have adopted zoning bylaws relative to solar installations. Most are modeled after the Model As-of-Right Zoning Bylaw published by the EEA, , which sets forth parameters for regulating setbacks, signage, decommissioning of the solar facility when no longer used, and location. Under the model bylaw, location is identified by establishment of certain areas on a zoning map where facilities may be located. Some towns (such as Salisbury) allow solar farms anywhere so long as they are located on 50 or more acres under single ownership in proximity to transmission lines. To date, no court has decided whether any of these bylaws meets the standard of being “necessary to protect public health, safety, or welfare.”
There is a least one case pending in the Land Court relative to the proposed siting of a solar facility in Hatfield, so perhaps some clarity will be forthcoming in the near future. However, so long as the courts have yet to rule, and so long as the legislature declines to clarify the standards for protection of public health, safety, or welfare, it appears that cities and towns would be prudent to consider adding solar zoning provisions to their bylaws to avoid the “solar farm next door” scenario. In the meantime, enjoy that new patio – hope it gets lots of sun!
Paula Curry is Of Counsel to the firm's Real Estate Department.
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Written by: Edward M. Bloom
Commercial landlords should be aware of the April 30th SJC decision in 275 Washington Street Corp. v. Hudson River International, LLC, in which the Court left the landlord of a defaulting tenant with essentially no remedy because of the language of the post-termination indemnification clause in the landlord’s lease form. Far from expressing sympathy for the landlord, the SJC stated that a “landlord left without an adequate remedy following breach of the lease by a tenant has only itself to blame for entering into a lease that fails to provide such a remedy.”
In April of 2006, the landlord leased premises on Washington Street in downtown Boston to a tenant for 12 years for use as a dental practice. Just a year into the lease, the tenant closed its practice, made some intermittent monthly payments during the next 12 months but then notified the landlord that it was not going to make any further rent payments nor was it planning to return to the premises. As a result, in May of 2008, two years into the lease, the landlord terminated the lease and sued the tenant and the tenant’s guarantor for damages.
Under Massachusetts common law, once a lease is terminated for any reason, including a tenant’s default, the tenant is no longer liable to pay rent thereafter accruing unless there is an enforceable lease provision specifying damages due the landlord as a result of the termination. Accordingly, commercial lease lawyers in Massachusetts typically preserve a landlord’s right to damages by employing several common provisions. One provision may require the tenant to continue to pay landlord each month as damages the monthly rent required by the lease as if the lease had not been terminated. Other provisions require the tenant to pay as liquidated damages a lump sum which may involve, (i) a full acceleration of the remaining rent due under the lease, discounted to present value, (ii) a partial acceleration equal to the amount by which the aggregate rent due for the remaining lease term exceeds the current fair market rent for the remainder of the term, discounted to present value, or (iii) a dollar amount equal to the monthly rent due for a period of anywhere from 6 months to 2 years.
The landlord in this case had nothing in its lease other than a provision that, upon lease termination as a result of the tenant’s default, the tenant was to indemnify the landlord against all loss of rent and other payments which the landlord may incur by reason of such termination. But the SJC, upholding the Appeals Court ruling in this case, concluded that “[w]here the specific remedy is indemnification and no other time period is established as to when payment is due, … under our common law … the indemnified amount shall become due at the end of the original lease period.” The Court reasoned that indemnification is a contingent liability which can vary in amount because of possible future events, such as a fire or other casualty, reletting by the landlord, and defaults by replacement tenants, so that the full amount which the tenant must pay for the remainder of the term under an indemnification clause cannot be fully ascertained until the original lease term ends.
In this case, such a holding means that the landlord will have to wait until 2018 to determine its damages, a result leaving the landlord basically without a remedy. As the SJC said: “We recognize the possibility, as did the Appeals Court, that our common-law rule, which requires the landlord to wait until 2018 to determine post-termination damages under the indemnification clause, ‘may in effect make it impossible for the landlord to recover its true damages from this corporate tenant or guarantor, because of the protections afforded by legal processes, such as dissolution or bankruptcy’.”
The lessons to be learned from this harsh decision are these: First, if an indemnification clause is to be used by a landlord as a remedy for a tenant’s default, whether in addition to or in place of a liquidated damages clause, the provision must set forth a date or dates prior to the end of the lease term (e.g., upon the re-letting of the premises, or at the end of each month during what would have been the lease term) at which time the landlord’s indemnification claim is to be measured. Secondly and more importantly, a landlord must set forth in its lease detailed and specific contract damages for which the tenant will be liable when the lease is terminated by reason of the tenant’s default. These provisions should reflect the liquidated damages clause referred to above and should at a minimum grant to the landlord the benefit of its bargain damages that are typical under the common law governing contracts in general.
Written by: Geoffrey H. Smith
When traditional sources of financing for real estate projects became more difficult to find in 2007 and 2008, some business owners and real estate developers turned to a new source of funding for their businesses and projects which, as it turns out, was not so new at all: foreign immigrant investors. The Immigrant Investor Program, or EB-5 Program, as it is widely known, has been around for over 20 years, but it is only in the past five years that the program has become a popular tool for real estate financing and a catalyst for the American real estate recovery.
The EB-5 Program was created by Congress in 1990 as a tool to propel the American economy out of recession and is administered by U.S. Citizenship and Immigration Services (USCIS). The EB-5 Program allows wealthy foreigners to obtain a green card and become a Conditional Permanent Resident of the United States if they invest a minimum of $500,000 in a qualified, for-profit U.S. business that creates or preserves at least 10 full-time jobs for two years. In turn, American businesses and workers benefit from an injection of new capital. This year alone, the program is expected to create 42,000 jobs at no cost to the American taxpayer and is anticipated to provide approximately $2.1 billion of foreign investment into the American economy when both jobs and investment dollars are desperately needed.
There are two basic investment options available to foreign EB-5 investor applicants. The applicant can invest directly on his own as an “individual investor” or he can invest through what is known as an “EB-5 Regional Center.” If the foreign investor elects to invest on his own, he must find a business opportunity on his own, such as one he can directly manage. This is an attractive option for investors who prefer to take an active role in managing their investments.
Alternatively, foreign investors can invest through a Regional Center, which is a specially designated form of public or private entity, created by Congress in 1992 to assist in the implementation of the EB-5 Program. These entities promote economic growth and job creation in specific geographic areas and act much like deal brokers who bring investors and target businesses together for a fee. 90-95% of all EB-5 visa investments are made through these Regional Centers which often coordinate multiple investment projects and visa applications at any one time.
Whether the investment is made individually or through a Regional Center, several requirements must be met in order for the investor to receive his green card.
Individuals must invest $1,000,000.00 (or $500,000 in a “Targeted Employment Area” defined as a high unemployment or rural area) creating or preserving at least ten jobs for U.S. workers, excluding the investor and his immediate family.
The investment must create or preserve at least ten full-time jobs for qualifying U.S. workers within two years (or in certain circumstances, a reasonable period of time beyond 2 years) of the investor’s admission to the U.S. as a Conditional Permanent Resident. These ten jobs can be created either directly by the investment itself, or indirectly in the Targeted Employment Area as a result of the investment. An example of indirect job creation could be those of a nearby restaurant that targets nearby business employees to frequent the restaurant for lunch. But one does not need to be able to trace and identify the actual jobs indirectly created. The USCIS will accept an economist’s opinion of job creation indirectly resulting from the investment based on statistical data for the Targeted Employment Area.
Mere preservation of ten existing jobs is also sufficient to meet the jobs requirement in cases where the investment is made in a “troubled business” in existence for at least two years which has incurred a net loss during 12 of the 24 months prior to the date of the investment.
To illustrate the extent to which the EB-5 Program has expanded in recent years: in 2007 there were 11 Regional Centers nationwide, today there are over 220. Similarly, in 2007 there were a total of 776 EB-5 Investor applicants nationwide. Today there are expected to be more than 3,500 applicants annually. While this represents a 350% increase in the number of applicants in just 5 years, there is still significant room for growth in the program. USCIS allocates 10,000 visas to the EB-5 program each year. To date, this quota has never been met in any calendar year. These underutilized visas represent a noteworthy opportunity for business owners and real estate developers.
An important downside to EB-5 is the time it takes to see the money. The time between application and funding can be 6 to 12 months in some cases. The time is needed for the Federal government to scrutinize the applicants to insure that their source of investment is not illicit and that the investor does not have a criminal past. Not only does our government do due diligence on the investor, but so does the investor’s government. This time period can be reduced, however, if a real estate developer wants to employ the capital before a visa is issued. But should the visa later be denied, the funds must be returned to the investor. For this reason, some developers ask for more capital (i.e. more visas) than they actually need for their projects. Another back up plan is to have available a line of credit.
In September 2012, President Obama signed into law a three year reauthorization of the EB-5 Program through September 30, 2015. If recent interest and past success is any indication of future results, Congress and the President would be well advised to make the EB-5 Visa program permanent, and perhaps even lower the minimum funding threshold for investment, to attract still more foreign investors to our shores to fuel a long overdue American economic recovery and an American real estate recovery.
Geoff Smith is an associate in the firm's Real Estate Department.
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Written by: Jack Slater
Recently, Mayor Menino filed a proposed Ordinance with the Boston City Council to require owners of medium and large sized residential and commercial buildings in Boston to report energy and water use to the Boston Air Pollution Control Commission ("APPC"), a unit of the City’s Office of Environmental and Energy Services (“EES”). Reporting would be required on an annual basis and will initially take effect for certain buildings in 2014. The APCC is authorized to develop detailed regulations for the reporting and disclosure of the information to be required of building owners. A copy of the proposed Ordinance is attached and the following is a link to a fact sheet provided by the City.
A summary of the proposed schedule for implementing the reporting requirements in the Ordinance is, as follows:
- Non-residential buildings of 50,000 s.f. or more, 2014;
- Residential buildings with 50 units or 50,000 s.f. or more, 2015;
- Non-residential buildings of 25,000 s.f. or more, 2016; and
- Residential buildings with 25 units or 25,000 s.f. or more, 2017.
Under the proposed Ordinance, energy and water use per square foot, Energy Star Ratings (Energy Star rates buildings from 1 to 100 using comparisons based on type of building, level of use and other characteristics) greenhouse gas emissions, and other identifying and contextual information for individual buildings will eventually be posted online.
In addition to reporting energy and water use, building owners may be required to conduct energy audits or other evaluations every five years to identify opportunities for energy efficiency investments. Buildings deemed in the top tier of energy performance based on the Energy Star Ratings system or already taking significant efficiency actions will be exempted from this requirement. Building owners would not be required to act on the audit.
Several other major cities, including San Francisco, Seattle and New York City, have adopted similar ordinances. The City of Boston, in announcing the proposed Ordinance, stated that lessons learned from those cities informed the Ordinance proposed by the Mayor.
A Better City ("ABC") has been working with EES to attempt to resolve concerns expressed by the commercial real estate industry. ABC reports that several changes have been made to the Ordinance as originally proposed through their efforts.
Some building owners and real estate organizations have nevertheless expressed concerns about the proposed Ordinance and questioned whether requiring such reporting will actually produce savings in energy use. The Greater Boston Real Estate Board has commissioned a study to determine if the ordinances adopted in other cities actually resulted in significant energy savings. Brian Swett, Chief of EES, in announcing the proposed Ordinance, asserted that measuring energy and water use has been shown to lead to greater energy efficiency, and a lowering of operating costs for building owners.
In filing the proposed Ordinance with the City Council, the Mayor stated that this proposal is intended to encourage energy efficiency and a reduction in greenhouse gas emissions and help the City to meet its climate action goals.
Jack Slater is a Partner in the firm's Real Estate Department.
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Written by: Joshua M. Alper
Many cities and towns, particularly in greater Boston, are criss-crossed with former railroad lines and rights of way, some of which have not been used in many decades, and may not be discernible by inspection. Purchasers and developers of Massachusetts real estate should be aware of two statutes which affect former railroad property: (i) General Laws chapter 161C, §7 creates a right of first refusal on the proposed sale, transfer, or disposition of railroad property in favor of the Massachusetts Secretary of Transportation (the “Secretary”); and (ii) perhaps more troubling , G.L. c. 40, §54A requires the consent of the Secretary prior to issuance of a permit to build a structure of any kind on land formerly used as “a railroad right-of-way or any property appurtenant thereto,” a term which includes former railroad property that may be located outside of the former right-of-way.
In the case of purchases directly from a railroad company, G.L. c. 161C, §7 requires the railroad company to make an offer in writing to the Secretary, who may notify the railroad company in writing of its rejection of such offer, or in the event that no response is received within ninety calendar days from the date upon which such offer is made, then the sale or transfer may be completed.
The permitting problem under G.L. c. 40, §54A is more difficult to satisfy because it relates to former railroad rights-of-way, which, because of the passage of time, may not readily be disclosed by inspection or by a fifty year title examination. Cases continue to arise in which recently constructed buildings are later determined to have been built without the benefit of the Secretary’s consent.
The mere fact of former railroad ownership is not a defect in title which may be covered by title insurance, but is an issue of marketability, and, in any event, is excluded from coverage by the standard forms of title insurance policy which explicitly exclude laws and governmental regulations which restrict, regulate, or prohibit occupancy, use or enjoyment, dimensions or locations of improvements which may be erected on insured land. The 1994 case of Somerset Savings Bank v. Chicago Title Insurance Company, 420 Mass. 422 makes clear that G.L. c. 40, §54A “does not affect the owner’s title to the property. It is a restriction that may affect the value of the property and the marketability of the parcel, but it has no bearing on the title . . . .”
In the event that title discloses the existence of a former railroad right-of-way or land appurtenant thereto, the Massachusetts Department of Transportation has established a procedure to obtain such consent by making application with a request for a public hearing, and submission of development plans through a local building inspector, including the location of proposed buildings and current and/or former railroad property line boundaries.
Although no regulations have been promulgated by the Department of Transportation a “Statement of Procedures” has been adopted. In the event that the Secretary does not consent to the issuance of a permit for construction, then a property owner may recover from the Commonwealth under the provisions of G. L. c. 79, as a taking by eminent domain. In the event that an owner discovers that buildings and improvements have been constructed without having obtained consent from the Secretary an application may be made retroactively, though in that event eminent domain damages may be limited.
The best way to protect a purchaser is through a thorough and vigilant title examination, including a search for evidence of former ownership by any railroad company, or use as a railroad right-of-way, which may be disclosed either in the direct chain of title, or in confirming boundaries of adjacent properties, or by reference to municipal and regional atlases which may depict former railroad rights-of-way and other prior uses.
Josh Alper is Partner in the firm's Real Estate Department.
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Written by: Gary D. Buchman
Commercial Tenants often request that Landlords accept a Letter of Credit in lieu of a cash security deposit. This blog examines the benefits and burdens of each from both the commercial Landlord and Tenant perspectives.
Cash Security Deposit:
First of all this represents cash out of Tenant’s pocket. Generally a cash security deposit is mingled with Landlord’s funds. Tenant’s security may be subject to the financial soundness of Landlord and the bank in which Landlord deposits its funds.
The only true negative for the Landlord is that the funds are Tenant’s funds and a petition in bankruptcy by Tenant is likely to freeze the security for disposition by the Bankruptcy Trustee.
Letter of Credit:
A Letter of Credit is the obligation of the Bank that issues the Letter of Credit and bankruptcy of Tenant will not impede Landlord’s ability to reach the proceeds of the Letter of Credit.
The Letter of Credit should be carefully drafted to permit the Landlord the right to draw down the proceeds (all or a portion) upon presentation to the Bank of a demand for payment in the amount to draw on, together with a certification by Landlord that it is entitled to draw on the Letter of Credit pursuant to the Lease. The Letter of Credit should also provide that it is renewable for consecutive annual periods; and that upon notice of nonrenewal at least thirty (30) days prior to expiration date of the Letter of Credit, Landlord may draw on the Letter of Credit. The Letter of Credit should expire no earlier than thirty (30) days after the expiration of the lease term.
The Letter of Credit and the Lease should each provide that the amount drawn down be replenished by the Tenant with a replacement Letter of Credit for the full amount. The Lease and Letter of Credit should expressly provide that its application is not a limitation on Landlord’s damages, or liquidated damages, or rent for the last month of the term of the lease.
The Letter of Credit should permit transfer to Landlord’s transferees. Landlord should also have the right to cause Tenant to replace the Letter of Credit with a Letter of Credit from another bank acceptable to Landlord in the event that Landlord becomes concerned about the stability of the Issuing Bank.
Complexity is the only true negative of the Letter of Credit. The Letter of Credit benefits Tenant who may still earn interest on the funds subject to the Letter of Credit.
Here is an example lease provision providing for a Letter of Credit.
Gary Buchman is Partner in the firm's Real Estate Department.
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