Lease-Leaseback in a Post-AB 2316 World

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1 CASBO 2018 Annual Conference Lease-Leaseback in a Post-AB 2316 World Alan Reising Long Beach Unified School District areising@lbschools.net Phil Henderson Orbach Huff Suarez & Henderson phenderson@ohshlaw.com

2 Lease-Leaseback Structure District Architect LLB Contractor Trade Contractor Trade Contractor Trade Contractor

3 California School District Procurement Generally Bid Limits. California school districts must formally and publicly bid contracts for construction projects over $15,000, unless there is an exception. (Public Contract Code ( PCC ) ) Design-Bid-Build (DBB) General Contractor (GC) Construction Manager / Multiple Prime (CM/MP) Lease-Leaseback is an Exceptions to DBB. Lease-Leaseback (LLB): Education Code 17406

4 Statutory Authority LLB was enacted at a time when there was a shortage of money for school construction (prior Education Code (a)): Notwithstanding Section 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. A couple of years ago, multiple LLB contracts were challenged, principally by one attorney.

5 Davis v. Fresno USD McGee v. Torrance USD Some of the LLB Cases CTAN v. Mt. Diablo USD (12 Cal.App.5 th 115 (2017).) Follows McGee in rejecting the Davis holding that a leaseleaseback must be a genuine lease, must include a financing component, and must provide for the use of the facilities during the term of the lease because those terms are not included in the authorizing statute. Also follows McGee in holding that sufficient facts alleged to allow a conflict of interest cause of action under Government Code section 1090 for private contractors because CTAN alleged the contractor, Taber, performed the functions of a public employee.

6 Some of the LLB Cases, cont d. California appellate courts are now divided on whether financing and a lease term are required in a Lease-Leaseback. This means that until the California Supreme Court addresses the issue, all superior courts are free to pick and choose whichever ruling they wish to follow or arrive at a result which is entirely different.

7 Recent Cases Conflict of Interest Hub City / Sahlolbei: The California Supreme Court has ruled that Section 1090 applies (including the criminal penalties) to independent contractors or consultants, where the consultant influences a public entity s contracting decisions or otherwise acts in a capacity that demands the public trust. (Hub City Solid Waste Services, Inc. v. City of Compton (2010), 186 Cal. App. 4th 1114, ( Hub City ); see also, People v. Superior Court (Sahlolbei) (2017), 3 Cal. 5th 230, 237.).

8 Recent Cases Conflict of Interest, cont d. Critical factor is the extent to which the person influences an agency's contracting decisions or otherwise acts in a capacity that demands the public trust. Resolves conflict between appellate districts on this issue. Follows the Davis ruling as it pertains to lease-leaseback contractors who are providing preconstruction services. Districts should assure that they maintain control of contracting decisions and do not effectively outsource that responsibility to contractor consultants.

9 AB 2316 New Requirements for LLB Became effective January 1, Was supported by trade unions, CASBO, CASH, others. LLBs must now be advertised in newspaper and in a trade paper. District can require a lump sum or a proposed fee for preconstruction and for the construction. The LLB contract can include preconstruction services even if plans are not yet DSA-approved.

10 AB 2316 New Requirements for LLB Contract shall be awarded based on competitive solicitation process to contractor providing the best value based on RFQ & RFP. (Ed. Code (a)(2).) District must adopt and publish the procedures and guidelines for evaluating the best value. District can either do one RFQ/P or separate RFQ and then an RFP. If it is not a lump sum (where the subs are prequalified too), the contractor must select subcontractors, in accordance with the publication requirements applicable to the competitive bidding process of the school district. (Ed. Code (a)(4)(b)(i).)

11 Most Common Structure District selects architect through competitive selection process. (Gov. Code 4525, et seq.) District advertises and selects contractor through Boardapproved process, criteria and scoring. District and contractor enter into LLB contract. District leases real property to a builder for $1. Contractor develops a price to construct the facility. This can happen at different points in the process. The District determines what portion of that price it will finance from the contractor

12 Most Common Structure, cont d. Contractor constructs the facility, then leases the facility back to the District. This is the leaseback component. The construction terms and conditions are part of the contract documents. District pays for construction costs through Tenant improvement payments during construction. District pays lease payments, plus interest, a period of time after construction. This portion is the amount being financed. Title to the new facility vests in the District as lease payments are made.

13 Suggested Process Per AB 2316 Changes Board Action. District Board adopts the procedures and guidelines regarding criteria for best value evaluation. (Ed. Code 17406(a)(2).) RFQ. District issues an RFQ to solicit contractors based on the Boardadopted criteria. Advertisement. District publishes notice of RFQ in newspaper and in trade paper. Prequalification. The RFQ includes a prequalification questionnaire, either the District s existing form, a new specific firm, or a 3 rd -party process (e.g., QualityBidders). Contract. RFQ includes the form of LLB contract.

14 Suggested Process Per AB 2316 Changes, cont d. Evaluation of RFQ. The District evaluates the RFQ responses based on the evaluation criteria and form that was part of the RFQ. RFP. The District issues an RFP that asks qualified contractors to price the project. Award. The District awards the contract to the contractor with the lowest proposal. Important The above process is only one option of many that are permitted under the new statute. District s can combine the RFQ and RFP steps, it can create a pool for multiple projects, it can award a contract on a lump sum price or on pricing factors, etc. District should consider various options and confer with its consultants and legal counsel prior to initiating one process.

15 Long Beach Unified School District Lessons Learned Examples of good things Working relationship and collaboration Short List of Contractors keeps interest high Pre-Construction allows early start of work Examples of bad things Sub-Contractor Selection Mis-Understood Financing Mis-Understood Workforce requirements = New LCP Program

16 Some Questions to Determine How to Adapt the Procurement Process Are the Plans DSA approved? If not, then are preliminary services/preconstruction services desired? One project? Multiple projects? Will there be a need for a pool of contractors for multiple projects? Is the project sufficiently described for a contractor to price its general conditions? Mark-up on subcontractor work? Mark-up on change order work? Fee? Bonds & Insurance? Other charges? When to prequalify the MEP subcontractors? In the RFQ? In the RFP? Depends on the completeness of design. If a contractor is selected and is free to select subcontractors later, do you permit a best value determination or low bid? If contractors are still competing at the RFP stage, same question. How much of the price to put into lease payments / financing? And many more

17 Contractor to provide an enforceable commitment to use skilled and trained workforce to perform all work falling within an apprenticeable occupation in the building trades. The project s skilled and trained workforce must be comprised of journeymen who have graduated from a state-approved program or have enough on-the-job hours to have graduated, and apprentices that are enrolled in a state-approved program. The District is the enforcing agency. Education Code Skilled and Trained Workforce

18 Education Code Skilled and Trained Workforce As of January 1, 2018, at least 40% of the workers employed by the entity and each of its subcontractors at every tier must be graduates of an approved apprenticeship program for the applicable occupation (certain subcontractors capped at 30%). Percentage only applies to each apprenticeable trade and not the entire labor force. Percentage increases over next two years: January 1, % January 1, %

19 Teamsters are no longer included. SB 418 (Hernandez) Changes to Skilled and Trained Workforce Skilled Journeypersons must be at 40% starting January 2018, except the following categories will remain at 30%: acoustical installer, bricklayer, carpenter, cement mason, drywall installer or lather, marble mason, finisher, or setter, modular furniture or systems installer, operating engineer, pile driver, plasterer, roofer or waterproofer, stone mason, surveyor, teamster, terrazzo worker or finisher, and tile layer, setter, or finisher.

20 Education Code Skilled and Trained Workforce Commitment for a skilled and trained workforce can be established as follows: The LLB agreement provides that the LLB entity and its subcontractors, of any tier, will comply with the labor requirements and provide a monthly report demonstrating compliance or will present a plan to achieve compliance. The District enters into a Project Labor Agreement that incorporates the skilled and trained workforce requirement and the LLB entity is bound by the PLA.

21 Recent Issues Skilled and Trained Workforce The content of the report is variable by district. The interpretation of the term skilled journeyperson is often misunderstood. This requirement is typically not addressed during the prequalification or the best value processes. LLB contractors approach to subcontractor selection has also been problematic on this front. Has impacted pricing in certain circumstances.

22 CASBO 2018 Annual Conference Lease-Leaseback in a Post-AB 2316 World Alan Reising Long Beach Unified School District areising@lbschools.net Phil Henderson Orbach Huff Suarez & Henderson phenderson@ohshlaw.com