Lease-Leaseback 201:Lessons Learned in Dancing School. Our Agenda

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1 Lease-Leaseback 201:Lessons Learned in Dancing School CASH Annual Conference February 26, 2013 Travis Kirk, Merced Union High School District Mark Quattrocchi, Quattrocchi Kwok Architects Glenn Gould, Dannis Woliver Kelley Glenn Our Agenda Introduction to lease-leaseback The application of Public Contract Code requirements Recent legal challenges 1

2 Our Agenda Travis Selecting the developer District concerns in negotiating a GMP Ensuring you get the lowest price Negotiation strategies Managing construction contingencies Mark Our Agenda The role of the architect on a LLB project. Advantages and disadvantages of early input by developer into design process. When change orders are reasonable and how to avoid them. Construction administration concerns. 2

3 Introduction to Lease- Leaseback LLB Process District competitively selects Architect to design project. District competitively selects Builder. Builder works with District and Architect during project design. Architect completes design and gets DSA approval. Builder lines up trade contractors and develops Guaranteed Maximum Price. 6 3

4 LLB Process, ct. Board awards LLB contract. Builder constructs the project for the negotiated Guaranteed Maximum Price. Both the site lease and facilities lease terminate when project completed and all payments made. Remember to record termination of leases! 7 Lease Leaseback Timeline Owner Architect Builder Owner lease to Developer Owner makes tenant improvement payments Lease expires Design Input From LLB Entity Construction Construction start Time Construction completion and lease payments begin 8 4

5 Contract Structure of LLB is Basically The Same as Design- Bid-Build Construction Manager (Opt.) Owner Architect LLB Builder or D-B-B Contractor =Owner Team Subcontractors 9 Compare to Design-Build Architect and General Contractor form single Design / Build Entity OWNER CM Owner has one contract with D/B Two phases - design and construction ARCHITECT DESIGN / BUILD ENTITY GENERAL CONTRACTOR Owner may add advocacy by inhouse team or agency CM Consultant s Subcontractors 5

6 History of LLB LLB is authorized under Ed. Code Very broad. Can use LLB for almost any project where construction of a building occurs. A long-term, revenue-based financing vehicle for projects. Growing problems with claims and cost overruns on design-bid-build projects led districts to look for alternatives to the low bid model. History of LLB LLB was rediscovered in the late 1990 s: qualifications-based selection rather than low bid. LLB widely used in recent years and growing in popularity. 6

7 The 3 Contracts Preliminary Services Agreement: Builder acts as a pre-construction consultant. Site Lease: District leases the site to Builder. Terminates when Facilities Lease terminates. Facilities Lease: Builder constructs facility per Plans and Specs. Builder leases the facility back to the District. Builder transfers title of the facility to the District upon final payment. 13 Payments During Construction Traditional structure: financing in place to fund interim payments. Option: tenant improvement payments, somewhat analogous to progress payments. After Construction Lease payment(s) If there is no significant financing, analogous to post-completion final payment(s), including stop payment notice requirements. 14 7

8 Financing Structure Developer obtains loan for financed portion. Obligation to repay is assigned to District. Loan proceeds utilized once money on hand is exhausted. Lender pays developer after District approves each payment application. Retention withheld and placed in escrow acct. District repays loan after project delivery. Financing Concerns Interest is tax-free to lender. Federal tax laws apply. Same concerns as with COP. Lease payment obligations can impact GO bonds. Encumbering site can limit other financing options. Sureties are sometimes resistant. 8

9 Minimizing Risk We Recommend a Validation Action once Board approves a LLB contract. Inexpensive Protects schedule. Advantages Select Builder by qualifications, not low bid. Builder can get involved in project earlier. Historically, fewer claims and disputes because Builder has had early involvement in design. Guaranteed Maximum Price and schedule control. 9

10 Disadvantages Bad Things Still Happen. LLB does not automatically bar change orders or claims (although less likely due to Builder s involvement with design), particularly: Site conditions Owner changes ( Scope creep ) Generally more expensive than design-bid - build. Application of Public Contract Code Requirements 10

11 Public Contract Code Requirements Those Public Contract Code Requirements which do not specifically pertain to the bidding process apply to lease/leaseback projects. Public Contract Code Requirements Examples Bonding requirements Stop payment notice requirements Prompt payment Claim resolution procedures Licensure requirements 11

12 Public Contract Code Requirements Less clear whether certain other provisions apply to LLB. Examples Substitution of subcontractors Sole source rules New pre-qualification rules (AB1565) Change order limitations Recent Legal Challenges 12

13 Recent Legal Challenges Several challenges to lease-leaseback projects during the past year. They claim: Competitive bidding required Conflict of interest disclosure laws have been violated Failure to comply with local bond requirements Remember to file your validation action! Selecting a Developer Why low bidder isn t always the best choice 13

14 The Sooner the Better Reduce change orders by identifying errors and omissions prior to start of construction Reduces chance of delays Helps identify Value Engineering options early Qualifications Assessment Take time to be thorough Developers won t tell you the bad news Review success of similar projects. Review the quantity and type of change orders Review timeliness of RFI s (late RFI s cause delay) Identify if the Developer is prone to end projects on site or in court 14

15 Qualifications Assessment Identify whether the Developer typically seeks delay claims Check for timeliness of submittals, especially deferred approval submittals Speak to previous clients District Concerns in Negotiating the GMP 15

16 Negotiating the GMP Multiple sub-contractor bids vs. best contractor (lowest price isn t always cheapest!) Availability of local participation Markups Liquidated damages Delay claims Contingency amounts Contingency Below are two $80 million projects. One is over budget and one is under budget yet they cost the same. Why? 16

17 Contractor Contingency Contractor Contingency-For the exclusive use of the Contractor in order to provide a fully functioning facility This contingency is for errors of the Contractor and bid scope gap All Contractors submitting proposals should have the same amount for this contingency. Otherwise the GMP amount appears skewed Owner Contingency Owner Contingency-To be used for errors and omissions, unforeseen conditions and Owner requested changes in scope. New Construction-Typically 4% Modernization/remodel-Typically 8% 17

18 Answer to Question Why? Some Districts will apply a smaller contingency amount at the time the Contract is awarded which gives the illusion of a smaller GMP. The Contractor does not mind if the Owner Contingency is small because once it is exhausted the District is still obligated to pay for Owner/Architect caused changes. Suddenly the public perception is that the project went over budget. Expectations Follow the guidelines of allocating contingency amounts. Bring the Contractor in early Hold them accountable (we are all bound by the same document. The Contract) Never forget that the success of the current project is what sells the public on voting for another! 18

19 Questions??? Roll of the Architect in LLB What do they do anyways? Programming, Design & DSA LLB looks similar to Design-Bid-Build Architect Part of Developer Selection Process Insight into contractor and subcontractor s experience Establishes early relationships Ideally Architect is experienced with LLB 19

20 Timing of Developer Selection Developer Selection AFTER DSA Approval With DSA approved plans initial Developer selection often includes the GMP Typical Post-DSA selection process First create short list of qualified LLB Developers Then provide DSA approved plans for GMP Selection still based on Qualifications and GMP Disadvantage missed opportunity for early contractor input Timing of Developer Selection Developer Selection BEFORE DSA Approval STEP ONE: Select Developer on Qualifications (no GMP yet) Recommend negotiate General Conditions, contractor fee & Pre-construction Services fee Developer provides Pre-Construction Services more on that in a minute Developer part of team and vested into project District has option to terminate before seek GMP 20

21 Timing of Developer Selection Developer Selection BEFORE DSA Approval STEP TWO: Once Plans are DSA approved Developer Bids Project for GMP In pre-con: Strategize bid packages - optimize prices Insist on large sub-contractor pool also local subs Review all sub costs - option to reject or rebid trades With Pre-Construction Services there are far fewer GMP surprises Pre-Construction Services This is one of LLB s Greatest Benefits Invaluable input on constructability, value engineering, cost estimating & scheduling Incorporate pre-dsa Architect must value collaboration with contractor Can occur after DSA Approval, but messy Creates Lasting Esprit de Corps really! 21

22 Change Orders Yes, Even in LLB There will be Change Orders Change Orders Contractor Versus Owner Change Orders Some projects mix these up separate in GMP Return all unused contingencies District/Architect Approves Contractor Contingency Use Architect still provides Change Orders Value checked and sometimes DSA approved Board approval not required 22

23 Change Orders Owner Change Orders from Owner s Contingency E/O, unforeseen and added scope May avoid Board approval time if included in GMP DSA Issues Recent DSA CO process now make this much easier Final DSA Form 168 is only accounting necessary Bottom Line A Quality Pre-Construction Phase Reduces Change Orders Construction Phase Construction Run Much Like Design-Bid-Build Meetings, Pay Requests, Submittals, CO s, etc. Advantages: Improved relationships Positive problem solving Most design issues vetted Reasonable CO pricing Reduced claim potential Just less stress and drama 23

24 Challenges: Construction Phase Potential to be Too Nice and not hold contractor accountable GMP may be higher then just bid to lowest bidder Made up with lower CO s and reduced claim potential Pre-con work requires more architect time LLB EXAMPLE American Canyon High School Numerous Developer Responses - Interview Four Initial Estimate: $130 Million Final: $121.5 M $8.5M saved in pre-construction Only 1% Change Orders Unused Contingencies Returned to District Would be $1.5 million but District added lots of scope 24

25 LLB EXAMPLE American Canyon High School Early Earthwork Phase Saved Time & Cost Potential Disasters Adverted Spike in steel prices Pre-purchased Oklahoma steel PRIOR to DSA approval Natural Occurring Asbestos (NOA) discovered during grading Frogs and Salamanders and Owls oh my! Giant NOA Pile in Middle of Earthwork Ribbit LLB EXAMPLE American Canyon High School NO CLAIMS & Everyone was happy! 25

26 QUESTIONS? Contact information Thank You! Travis Kirk, Merced Union High School District, (209) , Mark Quattrocchi, Quattrocchi Kwok Architects, (707) , Glenn Gould, Dannis Woliver Kelley (415) , 26