More on Electric Car Charging Stations – for Community Associations

A reader of  my post here sent me an e-mail message raising concerns about whether installing charging stations could make a community association an unlicensed electric power re-seller.  The reader raised an important issue.  As renewable/green energy infrastructure develops, so will statutes and regulations pertaining to it.  Any association interested in such things as electric vehicle charging stations or solar energy will want to be particularly sure to consult with legal counsel to ensure that contracts for such improvements address these evolving legal issues.   

 Specifically regarding electric vehicle charging stations in California, as part of its efforts to implement recently enacted Senate Bill 626 (requiring the PUC to develop policies to develop infrastructure for plug-in hybrid and electric vehicles) the California Public Utilities Commission (CPUC) very recently issued a decision that companies which sell electric vehicle charging services will not be regulated as public utilities pursuant to the Public Utilities Code and that, unless the charging station provider procures electricity on the wholesale market, utility sales of electricity to electric vehicle service providers do not constitute a “sale for resale” under the Federal Power Act.  In fact, the CPUC decision states, as a Conclusion of Law, that “condominium associations that provide electric vehicle charging on the premises as a service to the condominium owners . . . that have not dedicated their equipment to public use” are also not public utilities.  Notwithstanding this, the CPUC does, of course, have authority to dictate the terms under which the utility providing the electricity to power the charging stations provides service, so regulations requiring, for example, that customers notify a utility of anticipated increased connected load would need to be followed.  Again, it will be important for community associations installing charging stations to consult with legal counsel to address these issues during the contracting stage.

 With respect to rates, since the CPUC has decided that electric vehicle charging service providers will not be regulated as public utilities it will not be directly regulating the rates charged to use charging stations.  Insofar as the cost to purchase the electricity to power the charging station is regulated by the CPUC, however, and will be the largest business expense for the charging station’s owner (whether the association or a third party), the CPUC’s decisions regarding tariff rates will, of course, have an indirect impact.     

Failure to understand and address these sorts of regulatory issues can really throw a monkey wrench into the works of what should be a successful effort to “green” a community.  For example, earlier this year it was reported in local (Los Angeles area) media that a $25 million “solar farm” installed in the vast campus parking lots of a community college were sitting “unplugged”.  The solar equipment, owned by a third party, was intended to supply electricity to the Los Angeles Community College District via a Power Purchase Agreement (PPA), but the Los Angeles Department of Water and Power (DWP) would not agree to the arrangement, since the Los Angeles city charter bars the sale of power by any entity other than the DWP.  (This differs from state law pertaining to investor-owned utilities, which generally do approve PPAs).  Last I heard the LACCD was working on another financing arrangement, but these issues would, of course, have been more easily (and, I am sure, more cost effectively) addressed before the solar system was installed, not after.

Starting a Business? Remember That Hope Isn’t a Plan.

Optimism is a necessary component of the entrepreneurial spirit.  When it comes to starting and running a business, however, ignoring legal risks and hoping that nothing bad will happen is not a plan.  There is just too much that can go wrong.  Identifying your legal risks and then addressing them to eliminate the risks you can and minimize and manage the risks you cannot eliminate is not a failure of optimism.  Instead, knowing what your business liability risks are and managing those risks should free you to move forward with developing and growing your business with realistic hope, not nagging worries.

What are the most common (and most important) legal liability issues businesses (no matter how small) face?  I don’t know that any business attorney would be able to produce a comprehensive list of every possibility, but here’s my attempt at a reasonably complete outline of the issues which should at least be considered by every entrepreneur:

1.  Business Formation Issues:  Should the business entity be a sole proprietorship, partnership, LLC or corporation?  Even a single owner can incorporate or form a single-member LLC, and this decision is not strictly a legal matter, but should be made in consultation with an experienced business accountant as well.    

 2.  Business Governance Issues:  Once a decision regarding the type of legal entity the business should be is made, creating governing documents for that entity must be considered.  Even a single-member LLC should, ideally, have an operating agreement (and may have to have one to keep its legal status, depending on the jurisdiction).  A business with more than one owner (whether LLC members, shareholders or partners) needs governing documents, period, even when the business is family owned and operated.  What happens if someone wants “out”?  What happens if someone wants someone else “out”?  How will decisions be made if everyone doesn’t agree (particularly if there are only two owners)?  How do you get paid, how much, and how is that to be decided?  And, something which is very important to cover (but often entirely overlooked) – what happens when it’s all over (also known as the “exit strategy”)?  You have a choice – hire a lawyer at the beginning, while everyone still likes each other, to formalize your relationship, or wait until a conflict develops and then hire a lawyer to litigate it.  I’ll give you three guesses about which approach costs less, and the first two guesses don’t count.      

3.  Employment Issues:  Whether the business has employees or independent contractors, there are legal liability issues which should be addressed and managed with appropriate written agreements.  See here for a related post on some of these issues.  As far as I am concerned, there is no good reason not to have a written employment and/or independent contractor agreement.  In addition, serious consideration should be given to creating an employee handbook to cover not only the terms and conditions of employment, but such issues as technology use and potential abuse (including e-mail, social media, your website, etc.) and intellectual property issues such as non-disclosure agreements and/or assignments (if pertinent to your business). 

4.  Transactional Issues:  What will your business buy, rent or sell?  Whatever it is, you’ll need a contract.  See here for a related post on this issue.  As discussed below, form agreements from the internet are worth just about what you pay for them (probably much less).  If you start there, be sure not to end there, if you’d like to keep the money you earn.         

 5.  Capitalization Issues:  Unless you are a sole proprietor bootstrapping the startup of a business with your own personal savings, the manner in which the business will be capitalized must be considered and the associated legal issues handled appropriately.  Venture capital, equity and stock option compensation all give rise to legal liability issues which must be effectively managed in order for the business to succeed.  Even small businesses with no employees, in which the owners provide all of the “sweat equity”, can benefit greatly from an agreement which explains just exactly what in the way of rolling up the sleeves is expected of every member; it sure helps to prevent misunderstandings, hurt feelings and, ultimately, deadlock or worse among the business owners.

Can you handle some of this stuff yourself, and save some money?  This may sound strange coming from an attorney, but yes, I think you can.  One can easily stumble into “penny wise, pound foolish” territory in doing so, however.  Several times over the past year, for example, I have been consulted by sole proprietors who used an online service to create their business entities a while back, but then didn’t have any guidance on what to do with them (required filings with the Secretary of State, tax payments, corporate formalities such as minutes and meetings, that sort of thing).  As a result, they derived no protection against personal liability by forming their business entities.  They may as well have saved the money creating a corporation or LLC altogether, purchased great insurance coverage, and operated as a sole proprietor for a while, until they were ready to take on a partner or investor, or hire an employee.  A corporation or LLC you don’t know what to do with is really a waste of time and money to create, even through an online source.

Another example is using form contracts you buy (or find) on the internet.  Again, this may sound strange coming from an attorney, but you may be able to save some legal fees that way.  If you’ve found some contracts on the internet the terms of which you like, there’s no harm in giving them to your lawyer and explaining what it is you like about them.  Certainly, lawyers use their own template contract terms when they create new agreements (you didn’t think we start from scratch every time, did you?)  My own templates are only valuable to me because they are the end product of years of learning and “tweaking”, and they are only the beginning (there is a significant amount of customized drafting required to tailor a template to fit the specific needs of a particular business transaction).  Here’s a perhaps more concrete example.  An employment agreement you found on the internet may be worse than not using an employment agreement at all if its terms violate the employment law of your specific jurisdiction.  So for heaven’s sake, at a minimum you will want to have a business attorney at least review the contracts you intend to use in your business.  And by that I mean all of them.  Because using agreements with conflicting provisions may (you’ve got it) be worse than using no agreements at all.  So, strictly from a cost-benefit analysis perspective, you have two choices.  You can hire a business lawyer to create your business contracts for you up front (i.e., template contracts you can actually use to make money), or you can hire an attorney to litigate disputes over inapplicable or misused internet forms later.  I’ll leave it up to you to guess which approach is the most cost effective for your business.        

 My sense is that there are three big reasons why small business owners (particularly start-ups) don’t want to hire an attorney to help them.  They are ego, money and fear, and I’d say they vary in order of importance depending upon whether or not the business owner(s) has/have prior entrepreneurial experience.  What I mean is this:

 1.  Ego:  You have to be a pretty confident, self-assured person to start a business.  Often, the belief that one knows all one needs to know about all things related to that business, and better than anyone else could possibly, is an associated personality trait.  Of course, most entrepreneurs who try to start and run a business, and actually succeed at it, learn at some point in time that failing to enlist the assistance of a trusted legal advisor is a mistake.  For those entrepreneurs, the second time around is usually the charm, because they have learned to set aside ego in favor of effective legal assistance.

 2.  Money:  If you don’t have it, it’s hard to spend it.  Or, there may be some ego overlap (why pay for something you don’t need?)  Again, there are things you can do yourself to save money, but “penny wise and pound foolish” just doesn’t work for most businesses.  If you can’t afford a large, expensive business law firm, find an experienced solo practitioner who will agree to help you by “unbundling” his or her legal services and performing work for a flat fee, and at least get the basics covered so you can make money and keep some of it too.  It won’t get easier (or cheaper) to handle the legal “basics” than at the very beginning of a business.    

 3.  Fear:  Entrepreneurs who have tried to work with attorneys in the past who tended to thwart rather than facilitate getting business transactions done are understandably fearful of travelling that path again.  The best I can recommend here is that you find a lawyer who advises but doesn’t dictate, and that you spend some time with that lawyer explaining your business and your tolerance for risk.  Treat your attorney as a part of your business team.  It is his or her job to advise you on how to manage your legal risks, but ultimately (unless you propose to do something illegal) it’s your call.  Legal liability risks won’t go away because you refuse to hire a lawyer at all, or do but then avoid discussing your business risks with your lawyer.  And you won’t save yourself any legal fees that way either.  One of the best explanations of this “universal rule” I’ve ever seen can be found here (and in a more humorous way, here).

Furthermore, a rose by any other name . . .

. . . may also bring a visit from the tax man (or woman).  Or the labor board.  Or a process server.

My previous “Rose By Any Other Name” posts have been about (a) misnamed/unnamed insureds and (b) contracts (verbal vs. written).  This post is about independent contractors who are really employees (at least, as far as the federal and state tax authorities are concerned), and other “thorny” employee classification issues.

At this time of rising State and Federal deficits, there seems to be an increased scrutiny of how small and medium sized businesses are classifying their workers.  In addition, attorneys who represent workers before the Labor Board seem to be experiencing an uptick in business, commensurate with rising unemployment.  This is strictly based upon anecdotal evidence (I’m receiving more calls from business owners on the receiving end of employee pay and benefit claims), but my suspicion is that such claims, as well as tax enforcement proceedings, are on the rise and will continue along that trend for some time to come. 

Proper classification of workers as independent contractors or employees (and if employees, as temporary, part-time or full-time and as exempt or non-exempt) can mean the difference between financial survival or failure, particularly for a small business, and small business owners, who do not have their own HR staff, are often the least equipped to make these determinations.  Failure to properly classify employees can leave a small business vulnerable to claims for legally mandated employee benefits such as workers’ compensation and unemployment benefits, for discretionary benefits such as health insurance and paid time off, and for back overtime pay.  Properly classifying employees is particularly difficult for small businesses with fluctuating staffing needs, since it is easy for a busy small business owner to forget to reclassify a temporary employee who becomes permanent, or a part-time employee who becomes full-time.   

The solution?  Well, my instinct as a lawyer is this – put it in writing, and keep it in writing.  Even temporary workers could be given something in writing that makes it clear that their status is temporary, with an approximate time limit.  Then calendar the end of that time limit, as a reminder to revisit the issue of how that worker should continue to be classified.  And even small businesses should have a written personnel policy to point to when your employee classifications (or other employment practices) are questioned.       

More dangerous than a misclassification of an employee is the improper classification of a worker as an independent contractor.  Such a misclassification leaves the employer vulnerable to back payroll taxes and penalties as well, which can be substantial enough to put you out of business.  And, whether a worker should be classified as an independent contractor or as an employee can be a particularly tricky determination for a small business owner to make, since the criteria for independent contractor status used by the IRS, the federal Department of Labor and state labor departments don’t all impose exactly the same standards. and are not “exact” but, rather, are open to some interpretation.  Even large companies, such as Microsoft and Federal Express, have been the subject of expensive enforcement actions alleging misclassification of workers.  The new targets for such actions appear to be small businesses, and I’m sure that has alot to do with the fact that they are the most likely to be mistakenly misclassifying their staff.    

The solution?  Again, my instinct is to put it in writing.  As far as I am concerned, a written contract is absolutely essential.  Even with a written contract, however, treating the independent contractor as an employee may indeed make the contractor an employee, whether that’s what you intended or not.  For an explanation of how the IRS analyzes these issues, see IRS Publication 15A.   

Finally, years ago one of my community association clients learned the hard way that even with no employees it still needed workers compensation insurance.  That is because California’s Labor Code provides that one who hires a worker to perform work requiring a license is that worker’s employer if it turns out that the worker doesn’t have the required license.  (It may shock you to hear that sometimes unlicensed contractors lie about their unlicensed status and either provide a fraudulent contractor’s license number or “borrow” another contractor’s license number.)  The association hired an unlicensed contractor, one of the contractor’s employees was injured, and the association was on the hook, with no workers compensation insurance and with a workers compensation exclusion in its commercial general liability insurance policy.  To get a better feel for how California’s Workers’ Compensation Appeals Board analyzes the issue of employment status, take a look here. 

The solution to this problem?  Legal liability risk management, plain and simple.  A good insurance broker and an attorney to prepare the association’s own contracts, requiring contractors to maintain appropriate licenses and insurance coverage, would have been a big help.

Solar Energy for Community Associations – Contract Formation and Risk Management

It is important for any community association considering pursuing a solar lease or power purchase agreement (PPA) to budget for the cost of two important preliminary matters, a feasibility analysis and legal costs.  Skimping on either could ensure the ultimate failure of your efforts, costing the association considerably more money in the long run. 

With respect to a feasibility analysis, I am not talking about the relatively simple analysis performed by single family residential solar installers, comparing a home’s annual electric power use and applicable tariff rates to the anticipated cost and rate reductions of a solar system.  A community association’s solar power needs will be the equivalent of a larger scale commercial solar system, and the cost/benefit analysis for such a system is considerably more complex.  Investors (the prospective system owner for the lease or PPA) will want to see a detailed feasibility analysis in order to determine whether the numbers work for them from an investment standpoint.  Project scale and net metering challenges must be addressed in such a study, so that it can then be used as the basis for the financial terms of a proposed PPA.  Typically, a project which cannot achieve close to a zero balance net metering result is not economically feasible.  As the cost of solar energy system installations drops, and with the passage of AB 920 requiring utilities to roll over or buy surplus production credits effective January 1, 2011, investors will likely be placing less emphasis on achieving zero balance and more emphasis on tax incentives and other benefits of the investment, so exact scaling should become a less critical factor, but investors will still be unwilling to fund a system the feasibility of which has not been determined by a qualified professional.  Unfortunately, unlike our neighbors in Canada, there is currently no funding available to help subsidize the cost of a multi-unit residential solar project feasibility study (with the exception of affordable housing projects).  Nevertheless, it may be necessary for an association to incur the cost in order to attract investors.  A large scale solar installer may be willing to share in the cost, however, and some large scale installers have their own in-house professional engineering staff to perform detailed feasibility studies. 

When it comes to negotiating and drafting the lease or PPA itself, board members must understand and appreciate that, unlike the vendor, maintenance and repair contracts they are accustomed to, a solar power lease or PPA will by no means be a “one size fits all” or “industry standard” contract.  The array of issues which must be addressed, just a few of which I will touch on below, and the very long term nature of the agreement, will require careful negotiation and drafting.  Missing or inadequate contract terms will be fertile ground for future disputes between the parties, undermining the viability of the parties’ long term relationship.  Any association interested in pursuing solar power should, therefore, budget for the necessary legal costs associated with the formation of a complex legal agreement such as a PPA. 

The very long contract duration will also require the careful selection of contracting “partners” (the system installer and owner), and the maintenance of  a cooperative and collaborative relationship over the term of the contract.  Because of the length of the contract, due diligence regarding the financial health and long term viability of the system owner will also be vital.

With respect to the terms of the agreement itself, the scope and complexity of a PPA is much more akin to the construction agreements for a new development than to any contract the board of directors will have previously entered.  Installation, maintenance and operation risks will need to be identified, managed and insured.  In addition, the agreement will have to address such financial issues as buy out options and costs at the end of the contract term, warranty coverage and costs, system performance and monitoring (and how attendant risks are allocated between the parties) and dispute resolution mechanisms.  Liability risks and insurance coverage (both property and liability) must also be addressed, and in a way which accommodates the fact that risk exposures for solar power projects and, therefore, the commercial insurance market to cover such exposures, is evolving, and will likely continue to evolve over the term of the agreement.  The insurance issues in particular will need to be carefully considered since, while property and liability insurance coverage for owners, maintainers and users of solar power systems has become increasingly available since insurers first began issuing “green” commercial insurance endorsements in 2006, such coverage is often provided via “manuscript” as opposed to standard form policy provisions, and not all insurance brokers understand the risks or available coverage options. 

Finally, issues specific to community associations will need to be understood by all parties and carefully addressed.  Membership approval will be required due to the long term nature of the lease or PPA, and easement or license agreements will also be required, both of which will require time to achieve.  Since government granted financial incentives are as important (or more so) to system investors than expected revenues from sale of the power produced, and some incentives are time sensitive (requiring completion of the project within a specified time frame), failure to address the time required to satisfy these community association specific legal requirements may not only undermine the relationships between the parties, but resulting damage to the financing entity may expose the association to potential legal liability for which no insurance coverage is available.  This risk must, therefore, be adequately identified and managed by the parties.

The good news is that all of this is achievable, and has been successfully navigated in the context of PPA agreements for commercial and institutional building solar projects.  There is no reason why these issues cannot be addressed for community association solar energy projects as well, if community associations are careful to work with investors and installers who are familiar with such projects, and have legal representation to help them through the process.

Solar Energy for Community Associations – Funding

If you have volunteered for (or been assigned) the task of arranging for the installation of a solar alternative/renewable energy system for a California community association, you are a trailblazer.  That is because, with the exception of new construction and MASH (Multifamily Affordable Solar Housing) Program projects, I am not aware of any community association solar power installations having been completed in California to date.  If I have anything to do with it, however, there will soon be several under development. 

The first step a community association must take in order to obtain its own solar energy system is, of course, to determine how the purchase, installation, maintenance and monitoring of the system will be funded.  As discussed below, multi-unit residential communities which are community associations face particular issues when it comes to funding such a project.  I strongly believe, however, that we have reached a “tipping point” here in California at which these issues can be overcome. 

 The good news is that solar energy systems for multi-unit residential projects here in the United States have, indeed, been successfully funded.  For example, a 1,200 unit apartment co-op recently installed solar panels atop an older 20-story building in Manhattan, to become the largest multi-family residential solar array in New York City.  You can read about the project here.  With respect to funding the project, however, the story notes that the community, Kips Bay Towers, received financial incentives both in the form of a 50% rebate from the State of New York, and via tax credits, neither of which are available for non-profit community associations here in California. 

 Here in Southern California, our state’s first solar-powered apartment community was completed in 2007.  Solara is comprised of 56 fully solar-powered apartments.  As with Kips Bay Towers, however, funding for the project came from a variety of sources which are generally not available to community associations (again, unless they qualify as affordable housing).         

In contrast, Canada encourages all condos and co-ops (not just those qualifying as affordable housing) to install renewable energy projects via government incentives which include grants in addition to tax credits and rebates.  Federal and local government assistance to subsidize the cost of feasibility studies is also provided.  And, in general, Canadian government incentives in the form of rebates for installation costs to encourage alternative/renewable energy projects for industrial, commercial and institutional buildings (schools and hospitals) are made equally available to MURBs (multi-unit residential buildings).  Not so in the United States, unfortunately.  Here, neither the incentives offered to single family residential consumers nor those offered to commercial building owners are of any assistance to community associations, since they are all tax credit based.  In fact, the American Recovery and Reinvestment Act of 2009, which gives the Treasury Department the power to make grant payments in lieu of tax credits to persons and entities putting “specified energy properties” in place, specifically excludes tax exempt organizations from its purview (in fact, the involvement of a tax exempt entity as a partner eliminates eligibility for the payment).   

In addition, community associations in California face funding barriers in their own governing documents and by statute (the provisions of the Davis-Stirling Act).  A capital expenditure of the magnitude required for a community association to fund the installation of a solar system of sufficient size to be financially viable would require a special assessment, a loan, or both, and membership approval of both the installation of the solar system and the special assessment or loan.

There are funding alternatives to address all of the issues described above.  They are either a Power Purchase Agreement (PPA) or a lease.  With a PPA, a separate entity finances the installation of the solar system, maintains and operates it, and sells the electricity it generates to the property owner (in this case, the community association) at negotiated rates.  A lease is similar, but more suited to a smaller project, in which the association would lease the system from the third party system owner (the financing entity).  Under either funding model, membership approval would be required, because either would require a long term contract (15-25 years).  There would be relatively minimal up-front costs (a feasibility study and legal costs to negotiate the contract), and the long-term nature of the contract would provide a substantial benefit to the association and its members, stabilizing an operating cost which would otherwise be unpredictable, and fixing electricity costs by agreement as a hedge against rising utility tariff rates.  The incentive for the third party purchaser/owner of the system is the ability to take advantage of the tax incentives, including credits and accelerated depreciation allowances, which the association cannot make use of, and the certainty that, unlike the owner of a commercial building, barring a cataclysmic event the community association is guaranteed to continue to exist for the duration of the contract.  

Some single family residential solar installers are offering PPAs and leases to their customers.  That is not what I am talking about here, though.  (And that brings me to another, related, topic.  If you have been trying to find a residential solar installer for a common area energy system for your community association, stop.  A community association’s system is going to need the size, scope and sophistication of a commercial solar installer.  It is more likely that a solar installer with commercial project experience will be willing and able to participate in a PPA, as well.)  I am talking about a contract like the PPAs used to fund the installation and operation of solar power systems for large commercial and institutional (hospitals, schools) complexes.     

So, are there third party investors who are interested in funding solar power installations for community associations?  Until fairly recently I was not sure, so focused my attention on smaller commercial PPAs and took a wait and see attitude.  Every so often over the past year and a half or so I would revisit the issue to see if I could generate interest in funding for community associations, and there were some nibbles here and there.  Then, about a month ago, Governor Schwarzenegger signed AB 920, which requires utilities to roll over net metering credits or pay for excess power consumption, into law effective January 1, 2011, and the interest level increased a bit.  I have also heard through the grapevine that a national bank expects to announce its own funding program for community associations next Spring (I am told to expect the “launch date” to be in March 2010).  Based on all of this, I believe that now is the time for community associations interested in solar power for common area consumption to pursue it.