Friday, July 10, 2015

Dubious Leaseback Deals Not Limited To Home Equity Stripping, Usury Evasion Scams As Spotlight Of Suspicion Shines On N. California School Districts' Use Of Arrangement In Attempt To Conveniently Sidestep Competitive Bidding Requirements To Hand-Select Contractors To Construct Its Facilities

While so-called leaseback deals are common and legitimately used in the field of business and finance, the nature of the leaseback transaction is such that it is quite easily adaptable for somewhat dubious uses as well, such as an instrument of fraud (see, for example, Criminal Prosecutions Of Sale Leaseback Peddlers In Equity Stripping Foreclosure Rescue Deals), and as an attempt to evade usury laws (see, for example, Sale Leasebacks Or Disguised Usurious Loans; Substance vs. Form).

In a couple of recent stories out of Northern California, it appears that at least one other application of the leaseback transaction giving rise to some controversy involves the use of such an arrangement in a way that some believe is being used to possibly sidestep competitive bidding requirements imposed upon California school districts involving the building of its facilities (and involving the spending of a lot of money, not to mention potentially controlling whose "brother-in-law" ultimately scores the lucrative job), as the following two stories illustrate.
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In Fresno County, California, The Fresno Bee reports:
  • Fresno Unified School District leaders have denied bids by school board members to schedule a vote on hiring an independent investigator to examine a controversial construction deal.

    So trustees Brook Ashjian, Carol Mills and Luis Chavez are taking their campaign public. On Tuesday, The Bee published a letter to the editor from the three, who urged their fellow board members to consider an outside investigation. Ashjian, Mills and Chavez say it’s time for an independent probe into a lease-leaseback deal the district had with Harris Construction to build Rutherford B. Gaston Middle School that was recently deemed illegal.(1)

    ***

    [School Board President Cal] Johnson said the staff is in the process of reviewing the contracts in question. Before any related items can be placed on the agenda, the superintendent and his staff should have the opportunity to “thoroughly assess the impact of the Davis decision(2) and the use of lease-leaseback in constructing district facilities,” he wrote in the email.

    Johnson and [Superintendent Michael] Hanson did not comment on whether the item would be added to next month’s meeting. Amy Idsvoog, interim chief information officer for Fresno Unified, said Tuesday that the district is looking at ways to modify its contracts concerning lease-leaseback issues. “In the meantime, our Board of Education has asked the Supreme Court to provide further direction,” she said. Idsvoog did not say if the item would be added to next month’s agenda.
    ***

    The Fifth District Court of Appeal recently found that the district sidestepped the competitive bidding process to the benefit of Harris Construction and in violation of state law.(3)

    Lease-leaseback contracts are traditionally used to help poor or small school districts build schools by allowing them to lease the land where they plan to build to a contractor for a small amount, and then the contractor pays all the upfront costs. The district then “leases back” the building from the contractor and pays down the project costs over several years. But in this case, Fresno Unified had the money, which has led to allegations that the deal was made solely to ensure Harris Construction got the bid.
For the whole story, see Fresno Unified leaders reject hiring outside investigator on leaseback deal.

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In neighboring San Benito County, California, the Free Lance News reports:
  • The county's civil grand jury is the latest organization to challenge the use of lease-leaseback arrangements such as the ones planned for San Benito High School's bond projects.

    The recently released San Benito County Grand Jury report culminated the past year’s work of 19 volunteers who investigated taxpayer-funded agencies, either upon request or on their own volition. Those government entities are required to respond in some manner to the report’s allegations within 90 days.

    Among the grand jury's examinations, it looked at the San Benito High School District's narrow passage of the $42.5 million bond last June. As for question marks, the grand jury recommended the high school district reexamine the use of lease-leaseback arrangements, for construction projects, which forgo the public bidding process.

    San Benito High School District trustees earlier this month approved moving ahead on lease-leaseback arrangements for upcoming construction upgrades at the school gym, to air-conditioning systems and in classrooms.

    A court case from earlier this year called into question the Fresno Unified School District’s use of a lease-leaseback arrangement, according to media outlets.(4)

    Opponents of the process have argued it shuts down the public bidding process, a key part of maintaining transparency with taxpayer funds. In light of the court case, San Benito High School staff officials and district trustees recently examined the issue further in trying to ensure construction contracts were done appropriately.

    A lease-leaseback plan allows a district to lease land for a small amount—a minimum of $1, according to state education code—to any person, firm or company constructing a building for the school on that site. The private party picks its own subcontractors to do the work and is responsible for delivering the project at a fixed, “guaranteed maximum price,” swallowing extra costs if expenses run over budget.

    Once the project is done, the developer leases the property back to the district for a given amount of time.

    One of the grand jury's recommendations in its report includes the following:

    "District Leadership should conduct an in-depth evaluation of the feasibility of a lease-leaseback arrangement, compare and contrast to other construction methods and subsequently make public its decision and rationale before construction begins."

    The report went on: "If the Board chooses the lease-leaseback method, it should be with full understanding, awareness and ability to address issues that will arise due to inherent conflict with Public Contracts Code requirements that require bids. If the lease-leaseback method is implemented, clear guidelines should be established to address that conflict."
For the story, see Grand jury urges evaluation of lease-leaseback deals.
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Editor's Note: These leaseback deals are apparently controversial enough to attract the attention of authorities. See The Fresno Bee:
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Go here for other stories involving "leaseback" transactions as a method method of financing school district facilities, and occasionally, as a way to refinance an existing (sometimes empty) school building.(5)
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(1) Davis v. Fresno Unified School District, No. F068477 (Cal. App. 5th Dist, June 19, 2015). For a discussion on this court ruling, see Financing and an extended lease term now required for enforceable lease-leasebacks in California.

For a Sacramento Bee opinion piece on leaseback deals used to finance school construction, see Opinion: Politics, self-interest infest construction of California’s schools:
  • The decision, if upheld by the state Supreme Court, could be a financial bombshell, forcing school districts and their corporate partners to undo deals worth hundreds of millions of dollars.

    In response, school construction and contractor groups are seeking legislative validation of their leaseback deals. Their lobbyists are circulating language to that effect in the Capitol, looking for a bill to which it could be attached.
(2) Ibid.
(3) Ibid.
(4) Ibid.
(5) Wisconsin Watchdog: Lawmaker: Milwaukee school sale ‘stinks to high heaven.'

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