- Voice of San Diego - https://www.voiceofsandiego.org -

Lease-Leasebacks Offer Much-Needed Flexibility

 

Last week, Voice of San Diego ran an investigative story on school bond financing. But the article [1] doesn’t offer any proof of a pay-to-play system; it just points out overlap between the contractors who donate money for bond campaigns and the contractors who are awarded contracts through those bonds. This seems to be a classic example of confusing correlation with causation.

Let’s put lease-leaseback in its proper context. Lease-leaseback is neither inherently good nor inherently bad; it is an attempt by the legislature to create the very flexibility many claim to want from their school districts.

Context: Construction Project Delivery Generally

The classic model of project delivery for public construction projects, called “design-bid-build” allows the public entity to hire an architect/engineer to design a project, and then have a separate competition for the lowest-bidding construction company to build that project.

It would be like agreeing to make a complex dinner with groceries someone else bought. It’s pretty easy to get the general idea, but you have no control over whether all the right items for that meal ended up in your kitchen.

Perhaps the best model for controlling taxpayer costs and delivering quality projects is to use the “design-build” delivery model. Design-build, to borrow from former New York Giants coach Bill Parcells, is like being able to choose the groceries you use and then cook the complex meal yourself.

The public entity contracts with one company to design and build the project, and that entity has more control over ensuring it has all the right ingredients to construct the right project. It also properly aligns incentives and limits costly change orders.

This brings us to lease-leaseback, which is a delivery method that is generally accurately described by the authors here [1]. The benefits of this model are that it increases flexibility in selecting the contractors who are most capable to perform the work, efficiency and the ability to utilize a “shortlist” procedure to pre-qualify highly qualified bidders.

The Law: Understanding Lease-Leaseback

To understand the reality it’s important to know what the law actually says.

Education Code Section 17406(a) [2] reads:

Notwithstanding Section 17417, the governing board of a school district, without advertising for bids, may let, for a minimum rental of one dollar ($1) per year, to any person, firm, or corporation any real property that belongs to the district if the instrument by which such property is let requires the lessee therein to construct on the demised premises, or provide for the construction thereon of, a building or buildings for the use of the school district during the term thereof, and provides that title to that building shall vest in the school district at the expiration of that term, and shall contain such other terms and conditions as the governing board may deem to be in the best interest of the school district.” (emphasis added)

First, the purpose of the law is to allow for contracts to build schools.

VOSD, in its investigation into school bond contracts, quotes a local attorney [Kevin Carlin, whose opposing op-ed can be read here [3]] who makes the spirited claim that using lease-leaseback “breaks with longstanding requirements to award public construction contracts to the lowest bidder.” That the Legislature saw fit nearly 30 years ago to increase school district flexibility to contract without advertising for bids is not evidence of corruption or impropriety on the part of school districts.

Section 17417 [4] is the portion of the Education Code that provides a detailed set of procedures for accepting sealed bids. The Legislature explicitly excluded these requirements for lease-leaseback project delivery.

Unanswered Questions and Considerations

The authors of VOSD article highlight an inflammatory quote that uses terms like “influence,” “favoritism” and “possible corruption.” There is no mention that the law explicitly allows an alternative to sealed bid procedures for school buildings.

They also cite a former watchdog group president for the unquestioned proposition that “studies always show there’s a subconscious response in these situations.” Which studies? Has there been any analysis of the credibility or validity of the “studies”?

The quote, also highlighted, creates the impression of favoritism without any actual support. Without evidence of misdeeds, all that is left is an unsupported implication based on the overlap between donations to build public schools and the construction companies that build them.

Lease-leaseback delivery is not a perfect system, but it does add much-needed flexibility for public school construction.

Omar Passons is a local public works construction and land use attorney at the law firm Stutz Artiano Shinoff & Holtz APC. Full disclosure: Passons is a contributing member to Voice of San Diego.


Want to spark discussion? Start a conversation by submitting a commentary at Fix San Diego [5].