SUMMARY AND RECOMMENDATION INTRODUCTION AND FINAL ADOPTION AMENDED SBHE POLICIES 804, 804.1, 902, 902.1, AND 909. Summary

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1 SUMMARY AND RECOMMENDATION INTRODUCTION AND FINAL ADOPTION AMENDED SBHE POLICIES 804, 804.1, 902, 902.1, AND 909 Summary The 900 section in the SBHE Policy Manual contains policies applicable to management of institution facilities, including policies governing planning, construction processes, real property leases and related matters. Due to concerns about management of some capital construction projects, the SBHE amended policies related to construction processes in October At that time, the SBHE president requested a more comprehensive review of and recommendations regarding additional amendments to 900 section policies, with particular attention to leasing policies in addition to construction processes. A few months later, on April 5, 2010, the state auditor issued a performance audit report on NDUS capital projects that included a number of recommendations to improve monitoring of capital projects, including recommendations related to capital leases and a recommendation that the SBHE update a manual that provides guidance to architects and engineers and required contract terms. Then, on June 25, 2010, an independent consultant retained by the SBHE submitted a report and recommendations related to several institution capital construction projects that included recommended policy revisions. Under the chancellor s direction, a task force comprised of institution and system office representatives and chaired by Laura Glatt, Vice Chancellor for Administrative Affairs, has completed a comprehensive review of SBHE policies, NDUS procedures and the NDUS Architect/Engineer Manual. Considering the SAO performance audit, the independent consultant s report and industry best practices, the task force proposed extensive revisions to 900 section policies. In addition, the task force recommended revised implementing procedures including revised architect/engineer guidelines and contract terms for chancellor approval. The recommendations were intended to improve monitoring of capital projects and oversight of institution leases, as recommended by the SAO and independent consultant. Among other revisions, terms were defined in order to avoid misunderstandings, guidelines regarding items that must be included in cost calculations were clarified and detailed guidelines and approval requirements for capital and operating leases were added. The SBHE approved introduction and first reading of these policy amendments at a June 16, 2011 meeting. After this SBHE action, discussion continued and institution officials suggested additional amendments, including revisions to amendments the SBHE adopted in October of In view of these additional proposals, the SBHE decided at its September 2011 meeting to postpone final action on the amendments until the November 2011 SBHE meeting. Cabinet review and discussion was followed by review and discussion at a November 9 meeting of the Budget, Audit and Finance committee. BAFC members voted to recommend amendments advocated by institution officers relating to language governing whether certain costs must be included in calculation of project costs, that the SBHE had adopted two years before. On November 17, 2011, the SBHE adopted the BAFC recommendations and approved amendments recommended by BAFC and other amendments to 900 section policies. Since November of 2011, institution officers have suggested it would be helpful to adopt additional amendments to 900 section policies. The proposed amendments to Policies 902.0,

2 902.1 and do not change the substance of the policies; rather, the amendments consist of minor changes in phrases and words for consistency and clarity. The proposed amendments to Po9licy 909, relating to real property leases, clarify approval requirements and require chancellor approval of leases that exceed a specified total cost ($500,000 for NDSU and UND leases and $250,000 at other institutions). Recommended amendments to Policy 804, relating to equipment and personal property leases, and Policy 804.1, relating to tax exempt bond issues and lease purchase financing, are similar to those recommended in Policy 909. The administrative affairs council has reviewed the proposed amendments. Although business officers agree with many of the proposed amendments for these policies, the majority have concerns regarding proposed language in policies 804 and 909 requiring chancellor approval of institution lease agreements and they suggest final approval of the leases should rest with institution officers. The chancellor s cabinet also reviewed the proposed amendments and it would be fair to say that some presidents also don t agree with the need for chancellor approval of lease agreements. On the other hand, there are not any concerns regarding recommended amendments to policies 902.0, and More than two years have been devoted to this project and it is time to finalize a set of updated policies governing institution building projects and improvements. At the same time, it makes sense to adopt a uniform set of procedures governing institution lease agreements. It is important to move forward and implement the updated requirements. In order to do so without further delay, I recommend that the SBHE waive the second meeting requirement and approve introduction and first reading, followed immediately by second reading and final adoption of these policy amendments. Recommendation I recommend the SBHE adopt the following motion: That according to SBHE Policy 330, the requirement of a second reading is waived and the recommended amendments to SBHE Policies 804, 804.1, 902, 902.1, and 909 shown on the attached drafts are approved on introduction and second reading and final adoption, effective immediately. William Goetz, Chancellor Date of Meeting: April 12, 2012

3 NORTH DAKOTA STATE BOARD OF HIGHER EDUCATION POLICY MANUAL SUBJECT: FINANCIAL AFFAIRS EFFECTIVE: September 26, 2002 Section: 804 Leasing Policy Equipment and Personal Property Leases 1. All equipment and personal property leases shall be classified as either capital or operating leases. If at its inception, a lease meets one or more of the following four criteria, the lease shall be classified as a capital lease by the lessee; otherwise, it shall be classified as an operating lease: a. The lease transfers or permits transfer of ownership of the property to the lessee by the end of the lease term; b. The lease contains a bargain purchase option; c. The lease term is equal to 75 percent or more of the estimated economic life of the leased property. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criteria shall not be used for purposes of classifying the lease; or d. The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executor costs, such as insurance, maintenance, and taxes to be paid by the lessor, including any profit, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor and expected to be realized by him. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease. A lessor shall compute the present value of the minimum lease payments using his incremental borrowing rate, unless (i) it is practicable to learn the implicit rate computed by the lessor and (ii) the implicit rate computer by the lessor is less than the lessee s incremental borrowing rate. If both of those conditions are met, the lessee shall use the implicit rate. 2. Leases of equipment or personal property by an institution must be approved and executed by an officer delegated that authority pursuant to institution policy. Leases of equipment or personal property in the system office must be approved and executed by the chancellor or the vice chancellor for administrative affairs. In addition to approval by an institution officer delegated such responsibility or the vice chancellor for

4 administrative affairs, a lease or lease renewal, including transactions under a master lease, requires chancellor approval if: a. A lease entered into by NDSU or UND provides for total payments by the institution, including lease or rental, interest and all other payments over the lease term, of $500,000 or more; or b. A lease entered into by the NDUS office or NDUS institution other than NDSU or UND provides for total payments by the system or institution, including lease or rental, interest and all other payments over the lease term, of $250,000 or more. The chancellor may, in the chancellor s discretion, submit a lease to the Board for Board consideration and approval in lieu of chancellor approval. 3. Master leases and tax-exempt financing agreements are governed by SBHE Policy and must be approved by the Board pursuant to that policy. Real property leases are governed by SBHE Policy 909. Leases made without the required approval are not binding on the institution or Board. 4. Master leases and lease purchase agreements must also include: a. The purchase price at the termination of the lease. b. When and under what terms title to the property transfers to the state. c. In master leases and other leases under which interest rates are variable, the maximum rate. d. In master leases, the maximum amount financed or total amount of all transactions. 5. Leases of equipment or personal property shall comply with applicable policies and procedures governing purchasing, including competitive bidding requirements. 6. Prior to acquisition of an asset as the result of a lease agreement or other debt financing arrangement, the responsible institution official shall, unless the decision is dictated by funding limitations, prepare a written analysis documenting the decision to acquire the use of the asset, which shall be filed with the lease agreement or other document setting forth the terms of the agreement. If the decision is dictated by funding limitations, the official shall document those limitations. Each Consistent with NDCC section , each institution shall also keep on file provide to the office of management and budget as part of the biennial budget process a list of every individual leased asset, excluding real estate, with a value of at least fifty thousand dollars and every group of leased assets comprising a single system with a combined value of at least fifty thousand dollars acquired through a capital or operating lease arrangement.

5 7. The Chancellor shall adopt procedures defining required or recommended terms for lease agreements and defining the content and format for leases requiring chancellor approval. 8. Master leases and lease purchase agreements must also include: a. The purchase price at the termination of the lease. b. When and under what terms title to the property transfers to the state. c. In master leases and other leases under which interest rates are variable, the maximum rate. d. In master leases, the maximum amount financed or total amount of all transactions. 8. As part of the semi-annual budget status report to the Board s Budget, Audit and Finance Committee, institutions shall disclose all equipment and personal property lease agreements in a format determined by the chancellor. REFERENCE: N.D.C.C. Section HISTORY: Article II, Section 2.F. SBHE Minutes, September 9, 1982, page Amendment SBHE Minutes, May 10-11, 1984, page Amendment SBHE Minutes, October 26-27, 1989, page Amendment SBHE Minutes, May 24-25, 1990, page Amendment SBHE Minutes, April 23, 1992, page Amendment SBHE Minutes, January 20, 1994, page Amendment SBHE Minutes, June 26, 1995, page Amendment SBHE Minutes, April 4, Amendment SBHE Minutes, November 17, Amendment SBHE Minutes, September 26, 2002.

6 NORTH DAKOTA STATE BOARD OF HIGHER EDUCATION POLICY MANUAL SUBJECT: FINANCIAL AFFAIRS EFFECTIVE: September 26, 2002 Section: Tax Exempt Bond Issues and Lease Purchase Financing POLICY 1. The Board must approve issuance of bonds pursuant to NDCC ch or acquisition of real or personal property by any institution for which the Board is responsible pursuant to any form of installment purchase (such as a Lease Purchase Agreement) wherein the interest component of the periodic payments is intended to be exempt from state and federal income tax. 2. In order to take advantage of the lowest interest rates for tax exempt borrowings authorized by the Internal Revenue Code of 1986, as amended, the Board shall designate tax exempt obligations of the Board as "Qualified Tax-Exempt Obligations" under Section 265 of the Code if the Board intends to issue less than $10,000, in principal amount of tax exempt obligations in the calendar year in which bonds are issued pursuant to N.D.C.C. Chapter and principal obligation amounts are incurred under tax exempt installment purchase transactions. 3. The issuance of tax exempt obligations by the Board shall be coordinated by the institutions with the Chancellor s office. 4. The Chancellor shall adopt procedures to coordinate institution requests for tax exempt financing. 5. Institutions shall cooperatively utilize master lease agreements and other cooperative efforts to minimize costs. 6. Institutions shall submit copies of all bond rating reviews and updates to the NDUS office as they are issued and received by the institutions. HISTORY: New policy. SBHE Minutes, January 20, 1994, page Amendment SBHE Minutes, April 4, Amendment SBHE Minutes, September 26, 2002.

7 NORTH DAKOTA STATE BOARD OF HIGHER EDUCATION POLICY MANUAL SUBJECT: FACILITIES EFFECTIVE: November 17, 2011 Section: Definitions As used in these 902 section policies, unless a different meaning plainly is required: 1. Capital Project means the design and construction of a new building or major remodel of an existing facility and site developments that surround them where the total estimated purchased or donated project costs exceed $250,000. When developing a project to renovate an existing facility, the project authorization request shall include all projected renovation anticipated within that facility for the next 12 months. Capital Project costs include: a. Design costs; (to include OMB preplanning revolving funds); b. OMB preplanning revolving funds; cb. Architect and engineer fees; dc. Permits; ed. Insurance; fe. Land acquisition; gf. Site preparation or development; hg. Demolition and disposal; ih. Foundation and building construction or renovation, including fixed or attached equipment;and furnishings; ji. Landscaping; kj. Infrastructure and utilities; lk. Mechanical and electrical; ml. Parking and driveways or roadways; nm. Hazardous material abatement; on. Third-party costs; po. Contingencies; qp. Value of work completed by institutional trade staff; and rq. All other costs, including costs the institution does not intend to include in the legislative budget request, which must be separately identified. excluding FF&E. 2. Construction means, according to NDCC chapter , the process of building, altering, repairing, improving, or demolishing any public structure or building or other improvement to any public property. The term does not include the routine operation or maintenance of existing facilities, structures, buildings, or real property or demolition projects costing less than $100,000.

8 3. Construction cost means the actual cost of constructing, building, modifying or repairing existing building or fixed equipment (all Capital Project Costs less furniture and equipment excluding FF&E). 4. Renovation means any activity where an existing facility is modified to change its functional operation or organization (layout). This includes modifications to mechanical or electrical systems, including additions to the system, relocation of walls, doors, windows or other building components, and the installation of elevators within the existing building footprint. It does not include the routine repair or replacement of wall finishes, flooring, or ceilings. It does not include work which adds surface area to the existing building on any floor (new construction). 5. Repair means work required as the result of unanticipated failure. 6. Maintenance means routine work on or replacement of existing surfaces (wall finishes, flooring, ceiling) and building components subject to wear which does not change the structure. 7. Project budget estimate means a cost estimate that is determined by, for example, applying historical data, such as construction costs per square foot for a laboratory, to an anticipated project scope of work in order to determine project feasibility. 8. Detailed construction estimate means a cost estimate derived from a significant work effort by design professionals. It includes costing of specific construction components used for the construction work based on a fully developed design. A detailed construction estimate should include actual quotes for equipment, fees, and other expenses including contractor proposals if appropriate. The intent of a detailed construction estimate is to be within 5% of actual construction costs. 9. Project means changes to facilities or infrastructure, and includes not just building construction, renovations and repairs but also other improvements, such as infrastructure, electrical, mechanical, and technology systems, but does not include furniture, fixtures and equipment that are not attached to the building. 10. FF&E means furniture, fixtures and equipment which have no permanent connection to the structure of a building or utilities. 11. Fixed or attached equipment and furnishings means any piece of property which is built-in or that when installed in a facility for continuing use in connection with the facility, it is considered a permanent part of the facility and cannot be reasonably

9 removed without affecting the structural integrity of the facility, including its utility or ventilation systems. 12. Formal fundraising campaign means an organized and publicly announced undertaking to raise funds for an identified project Capital Lease means a lease that at its inception meets one or more of the following criteria: a. The lease transfers ownership of the property to the lessee by the end of the lease term. b. The lease contains a bargain purchase option. c. The lease term is equal to 75 percent or more of the estimate economic life of the leased property. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criteria shall not be used for purposes of classifying the lease. d. The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executor costs, such as insurance, maintenance, and taxes to be paid by the lessor, including profit, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor and expected to be realized by him. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of us use, this criterion shall not be used for purposes of classifying the lease. A lessor shall compute the present value of the minimum lease payments using his incremental borrowing rate, unless (i) it is practicable for hum to learn the implicit rate computed by the lessor and (ii) the implicit rate computer computed by the lessor is less than the lessee s incremental borrowing rate. If both of those conditions are met, the lessee shall use the implicit rate Operating Lease means a lease that does not meet the criteria of a capital lease. HISTORY: New policy, SBHE Minutes, November 17, 2011

10 NORTH DAKOTA STATE BOARD OF HIGHER EDUCATION POLICY MANUAL SUBJECT: FACILITIES EFFECTIVE: November 17, 2011 Section: Construction Process-Legislative Approval; List of Funding Requests 1. Board approval is required prior to making a request or application for state or federal appropriations, or to begin a formal fundraising campaign by an institution or entity acting under direction or on behalf of an institution to begin a formal fundraising campaign, for specifically identified new building construction, major renovations or major building additions. Approval is not required of grant requests for equipment only or for infrastructure that does not involve a major building renovation or building addition. Chancellor approval is required for requests or applications for funding for new building construction, major renovations or major building additions from all other fund sources, including competitive grant funds. 2. The Chancellor shall adopt an implementing procedure that includes definitions or guidelines to identify major projects governed by this policy. 3. In conjunction with biennial budget preparation, each campus shall submit to the Chancellor a prioritized list of projects consistent with the goals and strategies set forth in the campus master plan. The prioritized list of projects shall include: a. Major renovations to existing facilities; b. Major renovations to existing infrastructure, including technology upgrading; and c. New construction and additions to existing facilities, including the cost of renovating existing facilities that are made necessary by an addition or new construction. 4. The project descriptions shall, at a minimum, include: a. Project description and consistency with campus master plan; b. Total estimated purchased or donated project costs, including but not limited to, design costs associated with current proposed project, any (to include OMB preplanning revolving funds), architect and engineer fees, permits, insurance, land acquisition and site preparation or development, demolition and disposal, foundation and building construction or renovation, including fixed or attached equipment and furnishings, landscaping, infrastructure and utilities, hazardous material abatement, mechanical and electrical, parking and driveways or roadways, contingencies, the value of work completed by institutional trade staff on the project and other appropriate costs. Thirdparty costs, and any other costs the institution does not intend to include in the legislative budget shall be separately identified and disclosed; c. Furniture, fixtures and equipment (FF&E), including funding sources, to the extent these items have been identified at the time the project is submitted;

11 cd. Project funding sources; de. Estimates of current and future costs, including operating costs and identified funding sources of operating costs; ef. Other improvements directly related to or necessitated by the requested improvements; and fg. Responses to each of the criteria outlined in Section 7 of this policy. A copy of the form to be used for SBHE agenda requests can be found at: xxxxx 5. As part of the biennial budget process, the Chancellor, in consultation with the campuses, shall submit a prioritized list of state funded projects to the Board. The Board shall approve a rank order list of state funding requests for major capital projects, along with an unranked list of non-state funded projects. 6. Major capital project priorities shall be consistent with the following categories, which are listed in order of priority (except that a and b have equal priority): a. Projects to meet life, health and safety requirements. b. Projects that are necessary to comply with local, state, or federal law or other requirements. c. Projects that preserve current assets. d. Projects that represent new strategic investments through the enhancement of current assets or the creation of new assets. 7. The Board shall use the following criteria to determine a rank order of projects listed. These criteria are not weighted, but shall be considered in their totality when determining rank order of priorities. a. Project addresses current life, health and safety issues. b. Project addresses compliance with local, state or federal law or other requirements. c. Project corrects significant deferred maintenance. d. Project addresses a critical maintenance need defined by situations which must be addressed, and which, if neglected, could result in substantial damage to the structural integrity of the building. e. Project meets a compelling programmatic or accreditation justification consistent with campus mission and strategic goals. f. Project has been partially funded by the legislature in a previous biennium, but is not yet complete. g. Project is supported by significant outside funding. h. Space will be used to advance a specific program or activity that is a high priority of the state. i. Project addresses an urgent infrastructure need. j. Project is consistent with campus master plan and is highly rated by the campus. k. Project is necessary based on clearly demonstrated condition of existing space. l. Project fosters the consolidation of services or enhances operating efficiencies. m. Project enables the institution to remove obsolete or unnecessary facilities.

12 8. According to NDCC section , approval of the legislature (or, if the legislature is not in session and it is not within six months prior to a legislative session, budget section approval) is required to use donated funds, gifts or grants, in whole or in part, to construct buildings or other improvements if the total cost exceeds $385,000. For purposes of compliance with NDCC section , the total cost excludes equipment and furnishings that are not fixed or attached FF&E. Institutions must have Board approval to seek legislative or budget section authorization to proceed with a project funded with donations, gifts or grants. 9. Improvements may be financed by issuance and sale of bonds under NDCC chapter and other applicable laws and regulations. Institutions must have Board approval to request required legislative authorization for revenue bonds. REFERENCE: NDCC section ; NDCC section HISTORY: New Policy. SBHE Minutes, January 12-13, 1984, page Amendment SBHE Minutes, December 7, 1989, page Amendment SBHE Minutes, January 20, 1994, page Amendment SBHE Minutes, December 21, 1995, page Amendment SBHE Minutes, December 20, 1996, page Amendment SBHE Minutes, April 4, Amendment SBHE Minutes, February 19, Amendment SBHE Minutes, September 18, Amendment SBHE Minutes, October 23, Amendment SBHE Minutes, November 17, 2011.

13 NORTH DAKOTA STATE BOARD OF HIGHER EDUCATION POLICY MANUAL SUBJECT: FACILITIES EFFECTIVE: November 17, 2011 Section: Section: Requests for Construction, Renovation and Remodeling; Change Orders; Changes in Project Scope or Size 1. All buildings and other improvements shall be constructed within the limits of appropriations, bond issues, or other specific authorization approved by the Board or the legislature. a. Except with Board and, when required according to NDCC section , legislative or budget section approval, an institution may not significantly change, expand, or reduce a project (including changes to project size, intended use or funding source(s)) the Board or the legislature has specifically authorized and an institution may not spend or contract for expenditure of an amount that exceeds amounts authorized by the Board or legislature. b. The Chancellor, following consultation with the SBHE President, is delegated authority to act for the Board and approve a request for a significant change or increased expenditure for a Board-approved project or approve a request to seek legislative or budget section approval when required if a delay in approving the request pending Board action will result in a significant delay in project completion or additional cost increases necessary. A request for Chancellor approval must be in writing and include a detailed explanation regarding the impact of a delay in granting approval. Chancellor shall report and request SBHE approval of authorization under this section at the next scheduled SBHE meeting. c. A significant change or expansion to a project means an important or considerable change in design, intended use, size or major components of a building or other improvement or any increased expenditure compared to the project previously approved by the Board or legislature. 2. According to NDCC section : a. All local funds for a project approved by the legislature must be from sources approved by the legislature or by the budget section according to NDCC section ; and b. The source of any local matching funds required for state-funded or bonded projects must be funds raised and designated for the project and may not include funding from the state general fund, state and federal grant and contract funds, tuition or fees, endowment or investment income, institutional sales and services income including indirect and administrative costs, or transfers or loans from other institutions funds or agency funds, unless the institution has received prior approval from the legislature or

14 from the budget section under NDCC section An improvement means a public improvement as defined in NDCC section and includes a building or other structure, infrastructure, building addition, renovation, remodeling, fixtures or other work designed or intended to increase building or facility life or efficiency, maintenance or repairs to public buildings or facilities, or improvement to a nonpublic building or facility for the benefit of a public entity, if any portion of the cost is paid for with public funds. 4. The Board delegates to institutions authority to make improvements, including authority to select architects, engineers or construction managers and to enter into contracts and do all things necessary and proper to implement this authority, subject to available funding and required authorizations outlined in policy or statute, as applicable. 5. Authority to select architects, engineers or construction managers includes authority to retain an architect or engineer for preliminary design work that may be required or useful to develop a viable project proposal and reliable project cost estimates. Costs shall be paid from currently available institutional resources or OMB preplanning revolving funds. 6. Board approval is required to proceed with a capital project or improvement, whether or not previously authorized by the legislature, for which the total estimated cost exceeds $250,000. Required requests for authority to proceed shall include: a. A project description; b. Estimated total purchased or donated costs of the project, including but not limited to, design costs (to include OMB preplanning revolving funds), architect and engineer fees, permits, insurance, land acquisition and site preparation or development, demolition and disposal, foundation and building construction or renovation, including fixed or attached equipment and furnishings, landscaping, infrastructure and utilities, mechanical and electrical, parking and driveways or roadways, hazardous materials abatement, third-party costs, contingencies, and value of work completed by institutional trade staff, ; c. other appropriate Other related costs, including FF & E and other costs not included in the project request costs, which must be separately identified; to the extent these items have been identified at the time the project is submitted; cd. Specific source(s) and availability of funds by amount; de. Estimated completion date; and ef. An explanation of how the project coincides with or deviates from the campus facilities master plan and the biennial budget and reference to any previous Board or legislative authorization. 7. Institutions may not separate a project estimated to cost more than $250,000 into two or more projects in order to keep separate project costs at or below $250,000 and avoid seeking Board approval. Institutions shall plan and coordinate improvements so as to avoid

15 two or more separate projects in a building or facility, if with reasonable planning and coordination projects may be consolidated into a single project in order to minimize design, administrative and other costs. Nevertheless, events beyond the control of institution employees may result in two or more legitimate projects in the same building or facility at or about the same time. For example, an institution may have funding available for improvements to a part of a building occupied by one department and after contracts are awarded or work started on that project, a second department in the same building may receive notice of award of grant funds, including funds to renovate that department s space. Or, a renovation or remodeling project may uncover previously unknown conditions requiring additional work that must be separately bid or contracted. Institutions must be careful to document decisions to proceed with projects and timing of those decisions and be able to produce documentation of legitimate reasons for undertaking separate projects in the same building or facility at about the same time. 8. Projects estimated to cost more than $100,000 shall be contracted from competitive bids as required by NDCC chapter A project estimated to cost more than $100,000 may not be separated or broken down into two or more separate projects for the purpose of evading the competitive bid requirement. 9. The contract sum and contract time may be changed only by change order. Change orders may not be utilized to significantly change or expand a project or increase expenditures beyond what has been approved by the Board or legislature or to evade competitive bidding laws or policies. A change order means a written order to the contractor signed by the owner and architect and issued after execution of the contract, authorizing a change in the work or an adjustment in the contract sum or contract time. 10. Builder s risk insurance, carried by the contractor or the institution, is required throughout the construction period. 11. Except for a development or improvement not involving public funds on institution land leased to a private entity for development under SBHE Policy or as otherwise explicitly approved by the Board, all projects on institution land or involving institutionallyowned buildings or facilities, or projects for the benefit of the institution on land or in a building or facility not owned by the institution requiring expenditure of any public funds, must be managed by the institution, with the institution or a construction manager or contractor contracted by the institution a party to all contracts. Institutions must account for all project costs through the ConnectND accounting system. Projects must be monitored to ensure that project authorizations are not exceeded. In the event it reasonably appears that a project will exceed the spending authorization, institutions must seek appropriate Board or legislative approval before any expense that exceeds the authorized amount is incurred. 12. The Chancellor shall establish procedures implementing this policy.

16 REFERENCE: NDCC chapter HISTORY: SBHE Minutes, July 15-16, 1982, page Amendment SBHE Minutes, May 24, 1990, page Amendment SBHE Minutes, April 23, 1992, page Amendment SBHE Minutes, January 20, 1994, page Amendment SBHE Minutes, February 20, 1998, page Amendment SBHE Minutes, April 4, Amendment SBHE Minutes, November 21, Amendment SBHE Minutes, September 18, Amendment SBHE Minutes, October 23, Amendment SBHE Minutes, November 17, 2011.

17 NORTH DAKOTA STATE BOARD OF HIGHER EDUCATION POLICY MANUAL SUBJECT: FACILITIES EFFECTIVE: November 17, 2011 Section: 909 Real Property Leases 1. Except for agreements concerning development of institution property governed by Section and subject to restrictions stated in this policy or state law, authority to negotiate and execute real property leases and rental agreements is delegated to the institutions. 2. Real property is defined as land and buildings or other structures attached or affixed to the land, including attached and integrated equipment, anything growing on the land, including crops, and mineral interests. 3. All real property leases shall be classified as either capital or operating leases. If at its inception, a lease meets one or more of the following four criteria, the lease shall be classified as a capital lease by the lessee; otherwise, it shall be classified as an operating lease: a. The lease transfers or permits transfer of ownership of the property to the lessee by the end of the lease term; b. The lease contains a bargain purchase option; c. The lease term is equal to 75 percent or more of the estimated economic life of the leased property. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criteria shall not be used for purposes of classifying the lease; or d. The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executor costs, such as insurance, maintenance, and taxes to be paid by the lessor, including any profit, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor and expected to be realized by him. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of us use, this criterion shall not be used for purposes of classifying the lease. A lessor shall compute the present value of the minimum lease payments using his incremental borrowing rate, unless (i) it is practicable for hum to learn the implicit rate computed by the lessor and (ii) the implicit rate computer computed by the lessor is less than the lessee s incremental borrowing rate. If both of those conditions are met, the lessee shall use the

18 implicit rate. 4. The lease or rental, for a term of more than one year, of real property owned by the Board or an institution: a. Must be approved by the Chancellor unless otherwise provided by this policy. A lease or rental agreement for a term of one year or less shall be approved by an institution officer delegated that responsibility pursuant to institution policies; b. Must include a restriction prohibiting the lessee from making material alterations or improvements on or to the leased property without prior written authorization of the institution. Any alterations or improvements must conform to the aesthetics of the unit and surrounding area; c. May not be for the purpose of sparring or wrestling exhibitions except in compliance with NDCC chapter 53-01; d. For leases of agriculture land which reserve rent or service and leases of revenue producing buildings, may not exceed ten years; and e. For cafes, restaurants or other concessions contracts, must be limited to a term of not more than ten years and include a clause permitting termination by the institution upon sixty days written notice. 5. Institutions shall establish policies governing lease or rental of institution facilities for tournaments, meetings and other events providing that: a. Rent or fees shall be sufficient to cover the institution s expenses associated with the event; and b. The lessee must furnish documentation of liability insurance covering the event, naming the institution and state as additional insureds, with limits of liability no less than $250,000 per person and $1,000,000 per occurrence. Institutions may waive the liability insurance requirement for nonprofit groups and small events or substitute a requirement that every adult participant and a parent or guardian of every child participant execute, prior to being permitted to use institution facilities, a waiver releasing the institution and state from liability for every claim arising out of that person s participation in the event. Institutions may, for activities involving exceptional risk, require both liability insurance and waivers; and c. Revenues from leases shall be credited to the fund or funds which are utilized for the support, including maintenance, of the facility being leased. 6. Excluding capital and major operating leases, a A lease of real property from another entity by the system office shall be approved by the chancellor and a lease of real property by an

19 institution from another entity shall be approved by an institution officer delegated that responsibility pursuant to institution policies. All capital leases require Board approval. Major operating leases require Chancellor approval. All leases of real property requiring expenditure of public funds by the system or an institution must be limited to the current biennium for which funds have been appropriated or include a termination clause permitting termination at the end of the biennium if appropriated or other available funds are insufficient to continue the lease payments. Leases shall be executed by the institution s president, chief financial officer or other officer delegated that authority by institution policy or procedures. In addition to approval by an institution officer delegated such responsibility, an institution real property lease or lease renewal, including transactions under a master lease or an operating lease related to or part of a real property lease, requires chancellor approval if: a. A lease entered into by NDSU or UND provides for total payments by the institution, including lease or rental, interest and all other payments over the lease term, of $500,000 or more; b. A lease entered into by a NDUS institution other than NDSU or UND provides for total payments by the institution, including lease or rental, interest and all other payments over the lease term, of $250,000 or more; or c. The lease term is five years or more. The chancellor may, in the chancellor s discretion, submit a lease to the Board for Board consideration and approval in lieu of chancellor approval. 7. The chancellor shall adopt a procedure implementing this policy and defining a major operating lease. Institutions may adopt implementing procedures. As part of the semiannual budget status report to the Board s Budget, Audit and Finance Committee, institutions shall disclose all real property lease agreements in a format determined by the chancellor. 8. The chancellor shall adopt a procedure defining the content and format for lease approval. REFERENCE: NDCC sections (2) and (5); NDCC section ; NDCC section HISTORY: New section. Replaces Art. VIII, Section H 7/81. SBHE Minutes, September 15-16, 1983, page Amendment SBHE Minutes, January 3-4, 1985, page Amendment SBHE Minutes, December 2, 1985, page Amendment SBHE Minutes, January 20, 1994, page Amendment SBHE Minutes, September 19, 1997, page Amendment SBHE Minutes, April 4, Amendment SBHE Minutes, November 21, 2002.

20 Amendment SBHE Minutes, November 17, 2011.