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Arrangement can help save time and dollars, encourage collaboration

[caption id="attachment_34879" align="alignright" width="363" caption="The $7 million, 45,000-square-foot multipurpose building at Ross School is being constructed via a lease-leaseback deal. (Wright Contracting photo)"][/caption]

ROSS -- The general contractor for the $7.26 million Ross School gymnasium project will continue to lease back to school district the nearly half-done structure until the doors open to students. And Northern California districts increasingly are employing this somewhat complex lease-leaseback arrangement.

Advocates of that contractual arrangement say it allows school district project representatives to collaborate more closely with architects and general contractors earlier in the project to find solutions that lower costs and speed construction, encourage more use of local contractors and reward companies with good reputations.

[caption id="attachment_34880" align="alignleft" width="360" caption="Interior of the gymnasium (Wright Contracting photo)"][/caption]

Lease-leaseback arrangements, like the one between the Ross School district board and "developer-contractor" Wright Contracting of Santa Rosa, are being used more to allow districts flexibility compared with conventional competitive bidding rather than as an alternative to voter-approved bond financing, according to Tom Duffy, a legislative consultant for Sacramento-based Coalition for Adequate School Housing.

"What it is used for mainly today is as a project-delivery method, so districts can identify contractors through an RFQ, RFP or notice sent to interested companies," Mr. Duffy said.

Other up-and-coming project delivery methods other than the conventional design-bid-build process include design-build to bring more constructor experience to the design process, multiple-prime contracts, which can have competitive bidding on multiphase projects, and integrated project delivery.

Mark Quattrocchi, a principal of Santa Rosa-based Quattrocchi Kwok Architects, designer of the three-phase Ross project, said lease-leaseback contracts common in Southern California have started to be used by Northern California districts more in the past five years.

"I've been recommending it after having been through it a few times," he said.

Napa Valley Unified School District used lease-leaseback for the $121 million new American Canyon High School, completed last year, according to Mr. Quattrocchi, whose firm designed the project.

"Once we brought the contractor on board, we looked carefully at how we were going to be building things," he said. "After talking with subs, we were able bring down the cost by $4 million."

Specified in California Education Code section 17406, a lease-leaseback contract allows a school district board to extend a "site lease" for a designed project to a developer-contractor, usually for just the statutory "rent" of $1 a year and without publicly soliciting competitive bids.

The developer-contractor then enters a "facility lease" with the district for a "guaranteed project cost" and passing title back to the district upon completion. Unless the contractor has floated funds to the district that would be recovered, the guaranteed project cost often is made up of lease and tenant-improvement payments, analogous to construction contract draws in conventional competitive-bid jobs.

Advocates of lease-leaseback say it gives districts the ability to reward contractors that completed previous district projects on time and under budget with the potential for more projects. During competitive bidding on the initial new-school phase of the Ross project, Wright was the low bidder, committing to do the job at 20 percent below design estimates. The district and Wright entered the contract in November 2009.

One criticism is that negotiated pricing may not benefit districts as much as competitive bidding because of the severe competition among contractors  for work in the past five years. Negotiations on the developer-contractor guaranteed contract cost often involves reference to a comparable bid, such as Wright's earlier low bid, according to Mr. Quattrocchi.

State agencies tasked with approving plans and funding for school construction projects have raised concerns about lease-leaseback arrangements related to use of it with state and local bond financing as well as transparency in contracting arrangements.

In the past several years, some standards have developed. For examples, prevailing wages must be paid for design and contracting and subcontractors often are selected by competitive bid.

As an extra measure to stave off legal action by tax watchdog groups, other contractors or state regulators, often the lease-leaseback contracts are reviewed by a county judge and validated 30 days later if not opposed, according to Mr. Quattrocchi.