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Financing and an Extended Lease Term Now Required For Enforceable Lease-Leasebacks in California

Posted in Design-Build

On June 1, 2015, a California Court of Appeal held that in order for a lease-leaseback arrangement to be enforceable, the lease must be “genuine”, containing both a financing component and a lease term that extends beyond the construction period (Davis v. Fresno Unified School District, et al. (2015) __CalRptr.3d__ [2015 WL 3454720].)

Background

In 2012, the Fresno Unified School District (District) entered into a negotiated agreement utilizing the lease-leaseback project delivery method for the construction of improvements at a District middle school.  The District leased the project site to the contractor for a nominal amount through a site lease (the lease).  The contractor then constructed the project on the site and, during the construction period, purported to lease the site back to the District through a facilities lease (the leaseback).  The total of the facilities lease payments equaled the cost of construction, and were paid monthly based of the progress of the construction work.  Once the construction was complete, both leases terminated, and the facilities were handed over to the District.  Plaintiff Stephen Davis, a taxpayer, filed a lawsuit against the District and the contractor, challenging the noncompetitive contractual arrangement and contending, in relevant part, that the arrangement was invalid because it did not satisfy the statutory criteria for a lease-leaseback.

Decision

The Court of Appeal held that the exception to the competitive bidding requirement in section 17406(a) of the California Education Code only applies if a lease-leaseback is “genuine,” meaning that it includes both a financing component and a lease term during which the District uses the improvement (that is, a lease term beyond the construction period).  The rationale offered by the court was that the primary legislative intent behind the exception to competitive bidding is to provide a source of financing for the construction of public schools, enabling school districts to avoid the constitutional debt limit while making payments over an extended period.

In addition, the court noted that the performance of preconstruction (e.g., consulting) services may disqualify a contractor from securing the lease-leaseback contract itself on conflict of interest grounds.

Impact

Lease-leasebacks should include provisions which would avoid the result in the Davis case, specifically, by employing a lease as a tool to finance the project (rather than a tool to merely pay for construction), and by providing for a lease term that extends beyond the construction period.  Providing for an extended lease term may aid districts in resolving some troublesome issues associated with the completion of traditional construction projects, such as repair of defects and performance of warranty work generally.  However, it may be that the upshot of the Davis case is that districts will look to other delivery methods, such as the design-build delivery method, rather than lease-leaseback, when they want to select a contractor on factors other than low price.

IRWA Professionals Keenly Interested in Design-Build Issues

Posted in Design-Build

Identifying and allocating the risks associated with right-of-way acquisition in design-build projects was a hot topic for the standing-room only crowd at last week’s annual Education Conference of the International Right of Way Association in San Diego, California.  Nossaman litigation/eminent domain partner Artin Shaverdian hosted a panel on “Design-Build Projects and Right of Way Acquisition: Benefits, Challenges and Pitfalls.” Questions from the audience during the interactive session focused on the various approaches that agencies have taken to allocate responsibilities for right-of-way acquisition and utility relocation, and the related issue of allocating liability for right-of-way and utility relocation related delays.  The panel described the various risks unique to design-build, and the range of approaches taken, from the owner’s total retention of responsibility and risk associated by guaranteeing access to the design-builder by a particular date (e.g., Utah DOT’s I-15 Project), to transferring almost total responsibility and risk to the design-builder (e.g., SCDOT’s US Route 701 Bridge Replacements over Yauhannah Lake, Great Pee Dee River, and Great Pee Dee Overflow Project).  Alternative Technical Concepts and Value-Engineering Change Orders were also a major topic of interest.  The panelists described their individual experiences in how these concepts have been used to great benefit.

A show of hands from the audience indicated that about a third of the attendees had some experience with handling right-of-way acquisition in the design-build context for their respective organizations, and many indicated a need for enhanced processes for coordination and communication among the many different disciplines involved in design-build projects.  The panel emphasized that a successful design-build project requires that the right-of way team be involved from the early stages of project development, and there must be regular, systematic communication among all parties involved in the process.
Joining Artin on the panel, Mark Lancaster, right of way manager for the Riverside County Transportation Commission, brought his perspective gained from successful handling of the complex right-of-way acquisition process for the SR-91 Corridor Improvement Project that obligates the RCTC to deliver right-of-way access to the design-builder pursuant to an aggressive construction schedule. Joey Mendoza of Overland, Pacific and Cutler, Inc., provided insight on his firm’s best practices in coordinating the design-build right-of-way and utility relocation processes, and developing  technical requirements.  Also joining the panel was Nossaman infrastructure partner Donna Brady, who identified the various risks involved with right-of-way in design-build, and described how the owner’s right-of-way staff, technical advisors, and legal counsel work together to develop a comprehensive set of detailed RFP documents, in a manner consistent with the owner’s philosophy and goals for the project.  Ms. Brady is a co-author of a soon-to-be published NCHRP Study of the liability of design-builders for design, construction and acquisition claims.

Service Begins on Houston METRO Green and Purple Lines

Posted in Design-Build, Rail and Transit

Houston residents enjoyed free rides on Saturday, May 23, 2015 as part of the Metropolitan Transit Authority of Harris County (METRO’s) opening of the Green (East End) and Purple (Southeast) light rail lines.  The two new lines are part of an approximately $1.22 Billion expansion of METRO’s existing light rail system which also includes a 5.3 mile extension to the Red (North) line that began service in December 2013.  With the addition of the two new lines, Houston’s light rail transit system increases from 12.5 miles to 23 miles.

Since the opening of the Red Line extension, from the University of Houston Downtown to Northline Commons, its ridership has exceeded expectations and continues to grow.  March light rail ridership was 12.5 percent higher than March 2014, while overall bus ridership dropped by 3 percent. Even accounting for bus lines the train replaced, rail is carrying more riders, and its expansion north has meant more people can make direct trips downtown and to the Texas Medical Center.

The Green Line currently runs from the east side of the downtown Theater District to the BBVA Compass Stadium with plans to open additional stops extending the line further to the east in 2016.  The Purple Line runs from downtown to Texas Southern University and the University of Houston, which will give both universities’ growing student populations access to downtown businesses and eateries. Together, the two new lines add connections from the theater and nightlife districts downtown to Discovery Green, the George R. Brown Convention Center, Toyota Center, Minute Maid Park, Dynamo Stadium, the East End, University of Houston, Texas Southern University, MacGregor Park and Palm Center. With the new lines providing more access and additional stops, METRO’s light rail ridership is expected to continue to grow.Houston METRO

North Carolina Achieves Financial Close on State’s First Highway Public-Private Partnership

Posted in PPPs, Tollroads/ Turnpikes/ Managed Lanes

asdfNorth Carolina, acting through the North Carolina Department of Transportation (NCDOT), reached a major milestone on May 20, 2015 when financial close was achieved on the I-77 Express Lanes Project – the first highway public-private partnership in the state.  The project, with a design and construction cost estimated at approximately $591 million, will add 26 miles of tolled, express lanes along the existing I-77 corridor in the Charlotte region.  The financing package includes $100 million of private activity bonds and a $189 million TIFIA loan from the U.S. Department of Transportation, all of which are to be repaid by the project’s developer, I-77 Mobility Partners.  The developer will also invest approximately $248 million in equity and NCDOT, the project’s owner, will contribute approximately $95 million in public funds directly into the project.

The developer will design, build, toll, operate and maintain the express lanes for 50 years after construction and will assume the risk if toll revenues do not meet projections.  The developer is comprised of Cintra Infraestructuras, S.A. and Aberdeen Global Infrastructure Partners II LP, as equity investors, and the design-build contractor is Sugar Creek Construction LLC, a company affiliated with W.C. English Incorporated and Ferrovial Agroman, S.A.

A unique feature of the project is a contractual provision that enhanced the creditworthiness, and facilitated the financing, of the project.  Known as the Developer Ratio Adjustment Mechanism (DRAM), this contractual provision afforded contingent protection to lenders if the developer was unable to meet its debt service payment obligations due to insufficient revenues.  Under the DRAM, if the projected total debt service ratio for the next forecasted debt service payment fell below a ratio of 1:0:1.0, then NCDOT, subject to certain limitations and conditions, would make payments to the developer for the benefit of the lenders to cover the shortfall.  In no event could the DRAM payment exceed $12 million in any year or $75 million in the aggregate.   This “safety net” for lenders, which lasts until final maturity of the TIFIA loan, was a key factor enabling the project to achieve investment grade ratings.

According to NCDOT’s press release, the project will provide immediate and long-term traffic management solutions within three years after the start of construction, avoiding piecemeal improvements to the I-77 corridor that would have taken two decades using traditional funding sources.

The Texas Department of Transportation and Lane-Abrams Joint Venture Reach Agreement on the State Highway 360 Project

Posted in Design-Build

On May 15, 2015, the Texas Department of Transportation (TxDOT) and Lane-Abrams Joint Venture  (DB Contractor) entered into a design-build contract (DBA) and associated comprehensive maintenance agreement (COMA) for the approximately $300 million SH 360 Project (the Project).

Pursuant to the DBA, DB Contractor will design and construct and potentially maintain approximately 9.7 miles of improvements to SH 360 consisting of two toll lanes in each direction from approximately Green Oaks Blvd/Kingswood Blvd to US 287, in addition to frontage road and intersection improvements.  The Project also includes grade separation of the US 287 northbound and southbound main lanes with the SH 360 frontage roads.  The Project includes additional potential option work, which would complete the ultimate improvements at nine cross streets along the project right of way.  At TxDOT’s option, DB Contractor will perform comprehensive maintenance services under the COMA, including routine maintenance, capital maintenance and incident management, for up to three five-year terms after construction is complete.

Lane-Abrams JV was one of four proposers that submitted a Proposal for the Project.  Lane-Abrams JV is a joint venture consisting of Lane Construction Corporation and J.D. Abrams.  The major non-equity and other team members of the Lane-Abrams JV team include:

  • AECOM Technical Services, Inc.
  • Blanton & Associates, Inc.
  • CSJ Utility Coordinators, LLC
  • Fugro Consultants, Inc.
  • Hayden Consultants, Inc.
  • Infrastructure Corporation of America
  • K Strategies Group, LLC
  • Michael Baker Jr., Inc.
  • Pinnacle Consulting Management Group, Inc.
  • Rios Engineering, LLC
  • Rodriquez Engineering Laboratories, LLC
  • SE3, LLC

The parties anticipate construction to begin in late 2015. The Project, which is being constructed in collaboration with the North Texas Tollway Authority (NTTA), is scheduled to be completed in the fall of 2017.

Cities and State Legislature Organizations come together in Washington to Tout P3s during Infrastructure Week, 2015

Posted in News

As part of Infrastructure Week, 2015, several interested organizations banded together for an afternoon meeting on Monday, May 11, that focused on public-private partnerships as a way out of the infrastructure crunch.  Projects, big and small, stand to benefit from engaging the private sector to solve an array of infrastructure challenges.  The event was hosted by the Pew Charitable Trusts, and moderated by Cleveland City Councilman Matt Zone, who is also the 2nd Vice President of National League of Cities (NLC).  Art Smith, President of the National Council for Public-Private Partnerships (NCPPP) gave a primer on P3s, followed by perspectives from private equity investment, risk management professionals and engineering consultants, all of whom presented case studies on P3 successes.  Indiana State representative Ed Soliday presented the current state-level P3 legislative landscape, applauding the flexibility in Georgia’s most recent P3 statute and advising his fellow state-level legislators to allow the P3 market to give value to their constituents.

Attendees peppered the speakers with questions ranging from the prospects for federal level P3 legislation to the viability of local level P3s.  Co-hosts NCPPP, NLC and the National Conference of State Legislatures called the event a success.

California Needs to Spend $853 Billion for New Infrastructure

Posted in News

To help promote Infrastructure Week—which brings together thousands of stakeholders from around the country to highlight the critical importance of investing in and modernizing America’s infrastructure systems, and the essential role infrastructure plays in our economy—Nossaman is reposting this article on California’s infrastructure needs. To learn more about Infrastructure Week, which runs May 11-May 15, please visit www.infrastructureweek.org or follow Infrastructure Week on Twitter @RebuildRenew.

California is the most populous state in the Country; if it were a country it would have the world’s 8th largest economy.  So it’s probably no surprise to hear that a new study has found California needs to spend $853 billion to improve its transportation, water and K-12 schools infrastructure over the next decade just to keep up with expected growth in the economy and the population.  The question is how to pay for these needs and how to prioritize what gets built and when.

The report is the second in a series prepared by California Forward, a group that “distills the work of public commissions and private think tanks and articulate[s] specific reforms to restore the ability of elected leaders to solve problems, public managers to improve results, and voters to hold government accountable for those results”.  Here’s a link to their report.

The report discusses the existing revenue sources to fund this infrastructure need and finds there’s a $358 billion gap.  And the report itself acknowledges this is likely an underestimate of what is truly needed.  The State Department of Water Resources alone estimates the need for $200 billion of new water treatment and delivery facilities over the next 10 years.  For transportation the gap is even greater—almost $300 billion in large part due to the failure of the gas tax to keep up with needed repair, reconstruction and development of new roads, highways, bridges and transit systems.

Identifying and prioritizing funding for this vast infrastructure need is not just about where the money is going to come from—we need to look more closely at how we deliver these projects to better allocate the risks of cost, schedule and long-term maintenance and encourage private innovation in ways that will produce long-term benefits.  This report is the second in a series—another is expected and we would encourage the authors to consider how the private sector can be more involved in helping to solve the problem through the use of private finance techniques and innovative contracting methods, such as long-term, performance based public-private agreements.

University of California Issues Draft RFP for UC Merced 2020 Project

Posted in Social Infrastructure

UC Merced campusThe Regents of the University of California, on behalf of the University of California, Merced, issued a draft Request for Proposals (RFP) for the UC Merced 2020 Project on May 7, 2015.  The draft RFP was provided to the three proposers that were shortlisted in January 2015:

  • E3 2020:  Balfour Beatty Investments, Inc.
  • EP2 Developers:  Edgemoor Infrastructure & Real Estate LLC, Plenary Group (Canada) Ltd., and Education Realty Trust, Inc.
  • Merced Campus Collaborative:Lend Lease (US) Investments, Inc., Macquarie Capital Group Ltd., and ACC OP Development LLC

According to Daniel Feitelberg, Vice Chancellor for Planning and Budget at the University of California, Merced, the final RFP will be reviewed by the University of California’s Board of Regents, and may be released to the shortlisted teams by the fourth quarter of this year.

The UC Merced 2020 Project consists of the comprehensive development, design, construction, financing, operations, and maintenance of academic, administrative, research, recreational, student residence, and student services buildings.  The planned campus expansion is intended to support projected enrollment growth from 6,200 current students to 10,000 students by the 2020-2021 academic year.  The project will be developed on a 219-acre university-owned site which includes the current campus and 136 acres of adjacent, undeveloped land.

Developer Selected to Build U.S.’s Longest Cable Stayed Bridge in Corpus Christi, Texas

Posted in Bridges, Design-Build

The Texas Transportation Commission has conditionally awarded a comprehensive development agreement to Flatiron/Dragados for the longest cable stayed bridge in the United States.  The new Corpus Christi Harbor Bridge will allow larger ships to deliver their cargo to the Port of Corpus Christi, serving as an economic catalyst for the region and the State of Texas.

The conditional award, which took place at the April 30 meeting of the Texas Transportation Commission, authorizes TxDOT and Flatiron/Dragados to enter final negotiations for the design, construction, finance and maintenance of the bridge through a comprehensive development agreement.  Flatiron/Dragados, a joint venture comprised of Flatiron Constructors, Inc. and Dragados USA, Inc., was one of four teams the Texas Department of Transportation shortlisted for the project in June of last year.

The other proposer teams included:

  • Harbor Bridge Constructors, a limited liability company owned by Walsh Infrastructure, LLC.
  • Harbor Bridge Partners, a limited liability company owned by Kiewit Development Company.
  • Traylor-Zachry-Fluor Crosstown Builders, a limited liability company comprised of Traylor Bros., Inc., Zachry Construction Corporation, and Fluor Enterprises, Inc.

All four shortlisted teams submitted technical and price proposals on March 24 and April 7, respectively. The proposal submitted by Flatiron/Dragados was determined to offer the best value to the state of Texas based on price and various technical criteria. Final award to Flatiron/Dragados is conditioned upon successful completion of negotiations and finalization of the agreement, as well as compliance with various legislative conditions to execution of the agreements. Commercial close is anticipated to occur in the fall of this year.

The Corpus Christi Harbor Bridge Replacement Project includes the construction of a new, cable-stayed bridge over the Port of Corpus Christi Ship Channel.  The design proposed by Flatiron/Dragados includes a mainspan of 1655 feet, which, when completed, will be the longest cable-stayed span in the United States.  In addition to the construction of the new Harbor Bridge, the project also includes the demolition of the existing Harbor Bridge, as well as improvements to US 181 and SH 286.

The project will address structural deficiencies and navigational restrictions of the current bridge, and improve safety, connectivity, and level of service in the area. The purpose of the project is to correct these established needs and to promote, enhance and spur economic development in the area. The scope of the comprehensive maintenance agreement includes the design, construction, finance and 25-year maintenance of the project.

Congressman Delaney Talks Infrastructure Funding at IBBTA Conference

Posted in Financing, Legislation, Policy

Dollars ahead. Yellow traffic sign.On March 31, 2015, Congressman John K. Delaney (D-MD) spoke at the Washington Briefing of the International Bridge, Tunnel and Turnpike Association (IBBTA) in Washington, DC.  At the event, Congressman Delaney provided an update on a bipartisan bill he has sponsored known as “The Infrastructure 2.0 Act” to fund the federal highway program.  The bill uses international corporate tax reform to provide a six-year funding source for the Highway Trust Fund.  Specifically, the bill establishes a mandatory, one-time 8.75% tax on existing overseas profits accumulated by U.S. multi-national corporations, which replaces the current deferral option and tax rate of 35%.  The revenue generated would contribute $120 billion to the Highway Trust Fund and $50 billion to capitalize the American Infrastructure Fund – a new financing mechanism for transportation, water, energy, communication and education projects.  The bill also establishes a bipartisan and bicameral commission to develop a permanent solution for ensuring solvency of the Highway Trust Fund.

Congressman Delaney expressed optimism that the bill would garner broad support because the revenue generated was devoted to improving the nation’s infrastructure – a topic generally favored by Democrats.  At the same time, the bill also addresses international corporate tax reform – a topic generally favored by Republicans.  One of the outstanding issues, however, is finding the “sweet spot” for a repatriation tax rate acceptable to both political parties and the White House.  The “GROW AMERICA Act 2.0” proposed by the White House Administration offers a 14% one-time, tax rate.  By comparison, the “Invest in Transportation Act,” to be introduced by Senators Barbara Boxer (D-CA) and Rand Paul (R-KY), proposes a tax rate of 6.5%.