Lease-Leaseback Affected By New Legislation

November 2016

Assembly Bill 2316 (“AB 2316”), signed into law by Governor Brown in September, will change school districts’ lease-leaseback ("LLB") project delivery method effective January 1, 2017.  The following highlights some key provisions of AB 2316, which amends Education Code sections 17400 and 17406, and summarizes some of the practical implications of the new law for districts:  

  1. Transparent Selection.  Schools now have a statutory “roadmap’ for procuring LLB contractors on the basis of “best value” through a competitive selection process.  AB 2316 will require development and publication of a request for proposals (“RFP’) with transparent scoring criteria.  As part of the scoring criteria, schools can require contractors to provide a price “proposal” either on a lump sum or percentage fee basis.  AB 2316 answers concerns of unfairness raised in the past by dissatisfied contractors who were not awarded LLB contracts.   
  2. Timing.  Selecting an LLB contractor will now require more “front end” time.  Publishing notice of the RFP must occur in the same manner as a hard bid (once per week for two weeks).  Notice also must be published in a trade journal (which are often only published once per week).  Additionally, the last publication must be at least 10 days before the deadline for submitting proposals.  In many cases, this will mean at least a three-week publication period will be required.  
  3. Pre-Construction Agreements and Conflicts of Interest.  AB 2316 will allow schools to enter into LLB agreements before plan approval by the Department of General Services’ Division of the State Architect (“DSA”), thereby allowing preconstruction services to be built into the LLB agreement itself.  The law contemplates development of a final guaranteed maximum price (“GMP”) after the parties enter into the LLB contract, and after the parties have had an opportunity to perform traditional preconstruction activities.  Under this rubric, the final GMP will need to be approved by the school board.  This should reduce concerns about conflicts of interest raised in prior court decisions where contractors performed preconstruction services before being awarded the LLB contract.  
  4. Subcontracting.  If a general contractor lists a subcontractor in a successful proposal, that subcontractor must be used unless sufficient grounds exist for substitution under the Subcontracting Fair Practices Act.  If the general contractor does not list a subcontractor in its proposal, the general contractor must procure its subcontractors through its own best value process, or by conducting a bid in the manner that a school district would conduct such bid. 
  5. Financing.  AB 2316 does not address the disagreement among appellate decisions regarding whether a lease must be genuine or whether “financing” is required.  However, most districts will not find this to be an impediment, so long as their agreements are structured in a way that meets the requirements of Davis v. Fresno Unified School District.  
  6. Prequalification.  All general, mechanical, electrical and plumbing contractors/subcontractors must be prequalified prior to submitting a proposal.  It is important to budget sufficient front-end time for prequalification.  
  7. Comply Now.  Districts with LLB projects that will not have DSA approval before January 1, 2017 should plan to implement the provisions of AB 2316.  Current law will prevent such districts from entering into a LLB contract until after AB 2316 becomes effective.  

If you have any questions regarding AB 2316 or any other related issue, please call one of our six offices.

F3 NewsFlash prepared by Paul G. Thompson, James R. Traber and John W. Norlin.
Paul and Jim are Partners in the F3 Sacramento office.
John is Special Counsel in the F3 San Diego office.

This F3 NewsFlash is a summary only and not legal advice.  We recommend that you consult with legal counsel to determine how this legal development may apply to your specific facts and circumstances.  Information on a free NewsFlash subscription can be found at www.f3law.com.

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