© 2011 orbach huff & suarez 1 lease leaseback project delivery method kimble cook orbach, huff...

© 2011 Orbach Huff & Suarez 1

Lease Leaseback Project Delivery Method

Kimble CookOrbach, Huff & Suarez

© 2011 Orbach Huff & Suarez, LLP 2

California School District Procurement Generally California school districts must formally and

publicly bid contracts for construction projects over $15,000 (Public Contract Code § 20111), unless there is an exception

Lease leaseback (“LLB”) is an exception that was enacted at time when there was a shortage of money for school construction. Therefore, financing has historically been part of the arrangement, but not used much anymore (Education Code § 17406 (a)):

“…a school district, without advertising for bids, may let … real property that belongs to the district if the [lease] requires the lessee … to construct … a building or buildings for the use of the school district.”


Lease Leaseback – Basic Structure District selects builder through RFP/RFQ process

Recommended District leases real property to a builder for $1. (Site

Lease) Builder constructs facility, then leases the facility back

to the district. This is the “leaseback” component. (Facility Lease)

District makes tenant improvement payments (during construction) and lease payments (after construction). These pay for construction costs.

Title to the new facility vests in the District as lease payments are made.

District makes lease payments for period of time and then has the option to make a balloon payment to builder to buy out the facilities lease.


General Contractor: Design/Bid/Build

DistrictConstructionManager

Architect General Contractor

Subcontractors

= District Team


CM/Multiple Prime: Design/Bid/Build

District

Architect

Trade Contractor

= District Team

ConstructionManager

Trade Contractor

Trade Contractor

Trade Contractor

Etc.


Lease LeasebackDistrict

Architect

Trade Contractor

= District Team

Lease LeasebackBuilder

Trade Contractor

Trade Contractor

Trade Contractor

Etc.


Lease Leaseback Contracts Are Still School District Public Works Contracts Builder Must Pay Prevailing Wages. (Ed. Code

§17424) Payment Bond Required

Civil Code § 3247: “Every original contractor to whom is awarded a contract by a public entity . . . in excess . . . of $25,000 for any public work shall file a payment bond.”

Get a performance bond too. DSA Approval Required. Site must be approved

and design documents must be adopted before entering into agreements. (Ed. Code §17402)

Field Act Compliance Required. Construction is subject to all State approvals, as set forth in Education Code sections 17280 through 17313. (Ed. Code §17421)


LLB Provisions That Should Be Considered

Due to available funding, most districts have the construction funds for their project. Those districts make “tenant improvement” payments during construction.

In those instances, critics have asserted that the lease is, in fact, a conventional construction agreement.

But, Section 17406 does not state that the District’s payments be financed or that payment be deferred until the project is completed.

Districts must consider how quickly it can buy-out the lease.

A 6-month required occupancy prior to a buy-out option is more commercially typical than a buy-out option on the first day of the school district’s occupancy.

Districts have approved buy-out options at the time a “final payment” would be due under a standard construction contract (i.e., after 35 days and before 60 days after a notice of completion.)


LLB Has Some Risks, But Those Are Manageable

District staff understands that LLB can be used to bring in an outside contractor and to possibly pay too much for construction, all to avoid a low bidder.

District staff can take steps to prevent this and to ensure fairness, openness, and cost savings

Builder can be required to solicit bids from local contractors

Builder can be required to use the lowest bid for each trade contract, unless it can show to the District’s satisfaction why it wishes to choose the next lowest bidder.


Advantages of LLB Cost savings, through value engineering, etc. District can choose its builder through

experienced-based selection in lieu of relying on low bidder

District partners with builder. Guaranteed Maximum Price: District

negotiates a fixed price with builder. Unanticipated costs are builder’s problem. Reduces risk of change orders and delay claims.

Builder takes on more responsibility and therefore is more motivated to manage costs.

Our experience: most LLB projects are completed on time.


Disadvantages of LLB Project cost likely higher than a “formal bid” cost.

LLB is rarely a cost saving tool. Builder has no incentive to reduce fee or overhead/profit

amount because these costs are not formally bid. Current bid market is very hungry, but some of those

contractors may not be able to complete the project on time.

Balance this with cost savings in design review and cost savings of meeting the construction schedule and completing the project on time.

Additional documents. Lease documents and requirements are interjected into construction documents and requirements (or vice versa)

Some sectors of building industry and State have voiced concerns related to LLB.


Prudent Steps Construction cost should be in ballpark of

price if project had been competitively bid. Structure agreement so that it resembles a

lease agreement as closely as possible. Pick a builder:

That has completed many previous LLB projects, That has a solid track record of timely

completion, and If possible, that the District has had good

experience with.

© 2011 orbach huff & suarez 1 lease leaseback project delivery method kimble cook orbach, huff...

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