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Newly Enacted Bill Affecting Lease-Leaseback (AB-566)

  • Vol. 2015, No. 10
  • August 21, 2015

Vol. 2015,No. 10 | August 21, 2015

Starting January 1, 2016, school districts using the lease-leaseback project delivery method must:  (1) comply with mandatory prequalification requirements, regardless of funding source, and (2) meet escalating skilled labor requirements.  As discussed below, these changes are sure to further impact the use of lease-leaseback and lease-to-own agreements.

Background

Lease-leaseback agreements permit school districts to – without competitive bidding – contract with a developer to construct a desired facility on property leased to that developer for $1 a year.  At the completion of the construction, the developer leases the improved property back to the school district.  Once the lease is extinguished, the title to the improved property vests back in the school district.

As of January 1, 2015, only lease-leaseback projects funded with state bond money and costing one million dollars ($1,000,000) or more were required to comply with mandatory prequalification requirements.  For those lease-leaseback projects, school districts had to prequalify the direct contractor (a.k.a. “developer”), and all first tier mechanical, electrical, or plumbing subcontractors, if any.

Under existing statutes, there are no specific skilled labor requirements on lease-leaseback projects, unless a school district has entered into a Project Labor Agreement.

New Lease-Leaseback Requirements

On August 17, 2015, Governor Brown signed into law AB-566, which introduces major changes to school district lease-leaseback projects.

Now, the Education Code requires all lease-leaseback projects must comply with the mandatory prequalification requirements as provided in Public Contract Code section 20111.6, regardless of where the funding for that project comes from.  (Ed. Code, §§ 17406, 17407.)

Additionally, the bill places stringent labor requirements on all lease-leaseback projects.  Now, lease-leaseback agreements must provide that a “skilled and trained workforce” will be used by the lease-leaseback developer and every tier of subcontractors.  (Ed. Code, § 17407.5, subd. (a).) “Skilled and trained workforce” are either skilled journeypersons or apprentices registered in a state-approved apprenticeship program from any apprenticeable trade.  The minimum requirements for implementing this mandatory shift to skilled labor are contained in the chart below.

Effective Start Date Requirement for Qualifying Trades
January 1, 2016 30% of skilled journeypersons, or more, must be graduates of an approved apprenticeship program.
January 1, 2017 40% of skilled journeypersons, or more, must be graduates of an approved apprenticeship program.
January 1, 2018 50% of skilled journeypersons, or more, must be graduates of an approved apprenticeship program.
January 1, 2019 60% of skilled journeypersons, or more, must be graduates of an approved apprenticeship program.

Finally, the lease-leaseback developer must provide a monthly report to the district demonstrating that the developer and its subcontractors are complying with the workforce requirements.  This reporting requirement is not necessary if the project is subject to a Project Labor Agreement.

Impact

School districts are concerned that the new skilled work force levels will be difficult, if not impossible, to achieve in some regions of the state.  Also, there is a likelihood that the new requirements will result in a narrowing of competition in lease-leaseback developer selection and, therefore, an increase in construction costs.

If you have any further questions, please contact a DWK attorney.

PRACTICE AREAS
  • Business and Property
  • Public Finance

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