7-24-15

School’s Out?

Dating back to the 1940’s, Contractors are liable for paying back school districts should they sign a contract they know is illegal. With the recent court decision regarding the City of Fresno Unified School District vs Harris Construction Inc., many Contractors that have performed, or are considering performing, work for school districts under a Lease-Leaseback type of contract, may be entering into an illegal contract. Actually, with the recent decision, they WILL BE entering an area where the contract is illegal. As such, if a Contractor did that, they could perform all of the work and be forced to pay back all of the Contract revenue with the work in place. Ouch! To read about the Court decision, click here

The method called “Lease-Leaseback” was created to allow cash strapped school districts to pay for capital improvement projects by allowing them to bypass traditional competitive bidding on projects and they could hand select a contractor/developer to build the project for them. The way it works is the school district would lease the land to the developer for $1 and the developer would pay all the costs of building the project. At the end of the project, the school district would then pay the developer (usually over time) an agreed upon amount that they had negotiated prior to construction and once paid, the school district would then own the improvements as the “lease” would be concluded. This allowed the school district several years to get the dollars to build a project they needed “right now”.

I personally know several local ECA members that have been involved in these types of contracts and the fact that the recent court case has now deemed these types of contracts illegal, places some level of exposure on those contractors. I understand that it seems unfair to imagine that the school district could actually be repaid all of the costs of construction while getting the benefit of the completed project to utilize, but that is currently where the situation stands. Several groups have lobbied to fight this inequity on behalf of contractors and you can read about that here-–

Man oh man-what a tangled web we weave. It seems school construction should be as simple a process as one could get in contracting. However, smart developers and contractors have devised this means of getting work without competitive bidding that now has put them into harm’s way and they want their liability removed. There is lots of talk and effort in Sacramento to get a new bill passed that would negate the liability of Contractors that have performed work under these Lease-Leaseback arrangements. A good editorial is by Dan Walters and you can read it here–

So be aware! If a deal that gets you into the driver’s seat sounds too good to be true when public monies are involved, it is probably because it is too good to be true. Be careful guys!

That’s All Folks!

John Bly