TESTIMONIALS – BDC Financed K12 Lease-Leaseback Developments (Click for full endorsement letters)

“I am convinced that Mr. Baize [CEO BDC] is currently one of the foremost experts on Lease-Leaseback financing in the state.”
– John Christ, Asst. Superintendent, Natomas USD

“Jeff Baize [CEO BDC] was instrumental in obtaining the $66 million dollars in short term funding at 1.5% interest, which made the Lease Lease-Back alternative work for our District.”
– Mike Morman, Director of Facilities, Natomas USD

“Brookhurst’s low cost structured financing and lease lease-back development program for the award-winning Inderkum High School was unique and cutting-edge, and not only resulted in the project’s delivery ahead of schedule but also resulted in millions in savings to the District”
– Gary Davis, President of the Board of Education, Natomas USD.

“As an educator, Director-at-Large for the California School Board Association and elected political official, I am entrusted to protect the welfare of our community while furthering its mission to provide quality education. It is with pleasure and without hesitation that I endorse the financing, development and construction expertise of Mr.Baize and Brookhurst Development.”
– Dr. Susan Heredia, CSU – Sacramento/Former President – NUSD Board of Education

“The District was not obligated to make lease payments until the project was substantially completed…in the event the development team failed to deliver the project on time, the team was responsible for interest payments on the financing.  Mr. Baize’s [CEO BDC] understanding of the construction process and the lease-leaseback provisions of the California Education Code enabled him to efficiently manage the transaction from inception to closing and to respond quickly to any issues that arose.”
– Gene M. Yee, Managing Director (Lead in Education Financing), Piper Jaffray

“Brookhurst pioneered the financing and development of this facility, which was the first to use the creative financing and development structure for a public school through a lease lease-back arrangement.  Brookhurst’s performance was exceptional with the facility being completed ahead of schedule and under budget thereby saving the district millions of dollars in construction and fmancing costs.”
– Michael Corrick, AIA, President, Nacht & Lewis Architects (Architect of Record for Inderkum High School)

Lease-Leaseback Delivery Explained

Lease-leaseback delivery has been used by government agencies across the country for many decades.   It is a form of public-private partnership (P3), as it relies upon a private entity to fund and deliver a project.   It has been successfully used to finance municipal offices, correctional facilities, courthouses, civic centers and a host of other social infrastructure projects.  Its purpose is two-fold:

1. Use the private sector to provide funding when government does not have the capital immediately available for the needed construction project, and
2. The public agency can transfer all financing, schedule and construction cost risks to the private entity

A key difference between a lease-leaseback and other forms of P3 delivery is that the public partner always retaining full legal ownership of the land with its ownership remaining senior and unsubordinated to any financing or liens.   The legal structure involves two separate leases – the first being a ground lease between the public agency and the developer, and the second being a facility lease between the developer and the public agency.   In the former lease, the public agency is the lessor (landlord) and the developer is the lessee (tenant).   In the latter lease, these roles are reversed with the public agency being the lessee (tenant) and the developer being the landlord (lessor).   The lease terms are typically long – California Code allows a maximum of 40 years.   The two leases coterminous, and upon termination, the public entity owns the entire project free and clear.

California Public Schools/Lease-Leaseback Delivery:   In 1957, the California Legislature adopted lease-leaseback laws to allow its public school districts the ability to use the private sector to finance and build schools when districts did not have adequate capital.   Over the years, this law has evolved and can now be found in Section 17406 of Article 2 in the California Education Code.     Cal. Ed. Code Section 17406 reads as follows:

§17406.  Notwithstanding Section 17417, the governing board of a school district, without advertising for bids, may let, for a minimum rental of one dollar ($1) a year, to any person, firm, or corporation any real property that belongs to the district if the instrument by which this property is let requires the lessee therein to construct on the demised premises, or provide for the construction thereon of, a building or buildings for the use of the school district during the term of the lease, and provides that title to that building shall vest in the school district at the expiration of that term. The instrument may provide for the means or methods by which that title shall vest in the school district prior to the expiration of that term, and shall contain other terms and conditions as the governing board may deem to be in the best interest of the school district.

California School Lease-Leaseback and Legal Applications:  Of key importance in the above Cal. Ed Code §17406 is the provision that states a school district may enter into lease-leaseback arrangements without advertising for bids.   The exemption from bidding typically required in public contracting was affirmed in a published Appellate decision, Los Alamitos v. Howard Contracting,.   But because of this exemption, certain law firms saw a financial opportunity by crafting traditional construction contracts to take the form of a lease, although the substance would remain a traditional construction contract.    Using nomenclature characteristic of true leases, the attorneys renamed the construction contracts as “facility leases” with progress payments being renamed “prepaid rent” or “payment for tenant improvements”.   The school districts enjoyed this new form of contracting as facility directors could avoid all the lengthy process of issuing requests for proposals and simply contract with a favored construction company.     Construction companies that had strong relationships with school districts also enjoyed the no-bid environment as it assured them contracts absent any cost criterion.    Beginning in 2003 and onward, more and more California school districts began using the “lease-leaseback” subterfuge of construction contracting to a point wherein the vast majority of school projects were following this process resulting in billions of dollars worth of school construction in hundreds of school projects being delivered in this manner.

Unfortunately, abuse became problematic and a number of Grand Jury investigations revealed certain unscrupulous school district facility staff were handing contracts to firms that had family members while concurrently disallowing other firms from bidding.    Eventually, one contractor sued a school district with the result being the landmark 2015 published decision Davis v. Fresno Unified School District (“Davis”).   In the Davis case, the Appellate Court did a deep-dive into the history of Ed Code §17406, and provided a comprehensive review of all facts of this type of delivery.   The Court ruled in favor of the plaintiff, and, that such contracting was inconsistent with Ed Code §17406 and therefore illegal.   The following summarizes the Court’s findings:

Davis v. Fresno – Appellate Court Findings – EC 17406

• Illegal lease-leaseback contracts are prone to “favoritism, fraud and corruption”, and “misuse of public funds” in violation of the intent of the Public Contract Code.
• Parties designating a document as a lease means nothing – it is the substance of the contract that determines legality (citation Park Co. v. White River case).  The Court indicated it held “a disregard for labels in favor of substance”.
• The EC 17406 statute “requires a genuine lease and financing” and must be a “true lease”.
• The Court found that “legitimate use of lease-leaseback requires the contractor to carry the cost of construction and financing”.
• The Court indicated that a legitimate lease-leaseback must include a true post-construction facility lease as means for repayment of construction cost to the contractor, and, that such lease commences only when the district has “beneficial occupancy of the premises”.   Therefore, a facility lease cannot exist during construction because the district does not yet have occupancy.
• The contractor must “act in the capacity of a landlord holding title” and payment schedule should not be “of a relatively short period”.

The very well drafted and articulate Fifth Appellate Court decision can be read in its entirety here:   Davis v. Fresno Unified School District

Risks of Illegal Use of EC 17406.    If a lease-leaseback is deemed to be illegal, it could have severe repercussions for the parties involve:

Construction Contractor – There is concern in the legal community that based upon California law, and specifically a Supreme Court decision, Miller v. McKinnon, if such a contract with a school district is deemed illegal the contractor could have to return to the school district all funds received for the project.   Given the dollar size of these contracts, it could have severe financial consequences for the contractor.  It would also have an adverse affect on the contractor’s relationship with their surety (bonding) company.

School District – In a series of position statements issued by the California State Allocation Board (SAB), the SAB set forth its policy that if a court finds a lease-leaseback arrangement to be void, the SAB would not apportion state bond funds for the project as a “material inaccuracy” had occurred thereby being in conflict with State Facility Program Law.   Thus, a school district could lose any matching state bond funds that would otherwise be available for the school project if it enters into an illegal lease-leaseback contract.  Following is one such SAB statement:

State Allocation Board – Policy Statement on Funding Lease-Leaseback Projects