Court ruling changes construction plan
December 3, 2015
Hang on for a minute...we're trying to find some more stories you might like.
Email This Story
Last month, The Monitor reported that the Academic Core Project would be delayed because of a court ruling that called into question the planned “lease-leaseback” contract to be used for the construction. Below we answer some questions about the issue.
Q: What is the lease-leaseback delivery system?
A: Lease-leaseback is an alternative financing and delivery system for school construction projects that the California Legislature authorized in 1957. One of the most significant aspects of the lease-leaseback delivery system is that it makes the projects exempt from the competitive bidding process that most public construction projects go through.
With the lease-leaseback method, the school district leases the land to a designated construction firm for a token amount, say $1, and the firm then builds the school facilities on the leased land. After the facilities are built, the construction firm leases the land and facilities back to the school district for a determined period and rental amount. In this agreement, the construction firm acts as a landlord and the school district operates as the tenant.
Therefore, in the lease-leaseback arrangement, the construction firm carries the construction costs and financing. The school district pays the firm with fixed payments over a designated time period. The lease can last up to 40 years.
Q: Why did schools use the lease-leaseback system?
A: School districts, which are traditionally strapped for cash, use the lease-leaseback system because it lifts a substantial amount of the financial and economic burden from them. Back in 1957, the Legislature chose the lease-leaseback system for two key reasons, according to Carlin Law Group, which represents the plaintiff in the Fresno case: “(1) a constitutional provision that prohibited counties, cities and school districts from incurring any indebtedness or liability exceeding the amount of one year’s income without the assent of two-thirds of its voters and (2) the California Supreme Court’s determination that leases do not create an indebtedness for the aggregate amount of all installments, but create a debt limited in amount to the installments due each year.”
The lease-leaseback system was adopted as an alternative delivery method to benefit schools. However, its legality recently has been called into question.
Q: Why did Ohlone change the delivery method?
A: The recent ruling in the Davis vs. Fresno Unified School District court case opens up any project that uses the lease-leaseback delivery system to a lawsuit.
“It has called into question the validity and legality of many of the traditional lease-leaseback delivery methods, which is, until this case was decided, a fairly well accepted and popular delivery method which Ohlone College had been relying upon,” Ohlone’s bond counsel David Casnocha told the board in September.
Ohlone’s Academic Core is one of the largest school district construction projects in the state, and would be sure to attract attention had the district decided to continue with the lease-leaseback delivery system. Officials decided that changing the delivery method to low bid is the safest option moving forward.
Q: What is the cause of the delay?
A: The additional procurement effort will take an estimated five months, and the additional construction time could be two to four months. There also could be delays due to higher rates of change orders. “Right now our goal is for spring of 2019,” Joel Heyne, project executive with Gilbane Building Co., told the Board of Trustees in October. “But for any impacts that might be beyond our control could force us into the summer or latter semester of 2019.”
Q: How will this affect the cost and quality for the project?
A: Heyne warned trustees that the traditional delivery comes with “certain impacts we were hoping to avoid,” which he broke down into “schedule, cost and quality concerns.” Time is money, and the delay will pose costs to the college. Heyne said Ohlone also might have less quality control with the traditional delivery system. For one thing, Ohlone will not be able to hand-pick the construction firm that will build the heart of the Fremont campus. Also, the rental on the Fremont portables will have to be extended.
Q: Will this affect other projects, such as the sports fields?
A: The sports fields are not affected by this development, and are expected to be completed as scheduled. The baseball and softball fields are scheduled to open in March 2016 and the soccer field is expected to open in August 2016.
Q: How many other community college districts are affected?
A: Other community colleges in the area, including Foothill, De Anza, and San José/Evergreen are also changing their delivery methods. The California Community College Chancellor’s Office did not respond to requests for a complete list.