Barnhart delivers new campus under budget: lease-leaseback pacts hold promise for long-term financing for school districts.

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The $104.5 million Del Norte High School, with 212,200 square feet of ultramodern buildings encircling a courtyard on 62 acres, looks more like something you'd expect to see in the ritzy Beverly Hills 90210 ZIP code rather than suburban Poway.

NTD Architects of San Diego designed the buildings, which will house 2,250 students. Construction began in May 2007 in anticipation of an August 2009 completion date.

That such a big project was finished $2.1 million under budget and ahead of time in May had a lot to do with the rarely used construction agreement, say Eric Stenman, president of Barnhart, the San Diego-based general contractor, and Doug Mann, executive director of facilities for Poway Unified School District.

The two men sing the praises of the so-called lease-leaseback agreement. In fact, Stenman envisions such an agreement as an opportunity for Barnhart, a subsidiary of Atlanta-based Heery International, to do long-term construction financing for other school districts. But more on that later.

Mention the term lease-leaseback to most people, however, and they'll roll their eyes. At least that's what Mann says he did when he first heard it.

But he became a believer in the alternative method for financing school construction projects when the district built Stone Ranch Elementary, which opened in 2004.

"Things went so well," he said. "The quality was good and there were no problems with subcontractors."

Lease-leaseback is not new, however. It was sanctioned under the state Education Code in the 1960s as a way for school districts to obtain financing, but wasn't widely used in the 1980s and didn't gain traction until 2001, Stenman says.

How It Works

Basically, the contractor leases the site from the district for $1 per month, thus gaining the right to build on that property. The contractor, in turn, subleases the tract back to the school district, and the monthly sublease payments the district makes cover the cost of construction.

Also, the general contractor gives the district a maximum guaranteed price for the job.

Legalities aside, a lease-leaseback agreement saves time and allows for better communication between the designer and general contractor early in the process. Mann says it also enables the district to hire a contractor and architect at the same time.

"The contractor can work with the architect," Mann said. "The architect knows the rules and regulations but the contractor lends a practical eye to the design phase."

Mann and Stenman say such collaborations eliminate the excessive use of costly change orders and construction delays.

Old-Fashioned Way

"The old-fashioned way of design-bid-build is inherently rather confrontational," said Bruce Thomas, associate principal with NTD.

Under design-bid-build, an architect can spend up to a year designing a school. Then those plans have to go to the Division of the State Architect for approval, which can take six to 12 months, Stenman says. Advertising for bids takes a month and the district might spend a few more months selecting the lowest bidder.

Because the lowest bidder doesn't need to have school construction experience, it can create potential problems, he adds.

If a bidder grossly underestimated what it would take to do the full scope of work "quality suffers and the schedule is thrown off because he has no motivation to do the job," Mann said.

Moreover, lease-leaseback agreements give districts flexibility in selecting contractors. The Poway district, he says, has a list of four pre-qualified general contractors to choose from and each has its own list of pre-qualified subcontractors.

Del Norte High features 48 standard classrooms, 12 science labs, five art labs, two music rooms, 11 vocational education classrooms, a football stadium, swimming pool, performing arts complex and gymnasium.

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The Poway district counts 37 schools, including its new Del Norte campus. It has built six schools using lease-leaseback agreements and remodeled 10 others that way. Barnhart also built Westview High for the district under lease-leaseback and has two remodeling projects in the works that will have the same type of agreement.

Good For Cash-Strapped Districts

Stenman, meanwhile, says his firm is looking at lease-leaseback as a way to provide long-term construction financing for cash-strapped rural school districts.

Wealthier urban districts might also be interested, if Sacramento squeezes the spigot on bond funding.

As part of the deal, Barnhart might operate services such as maintenance, the repair of heating, ventilating and air conditioning, commonly called HVAC, and janitorial work.

In that case, Barnhart would contract for existing district personnel to perform those jobs, Stenman says, adding that the general contractor is in talks with some districts.

Providing long-term financing for school construction or remodeling via lease-leaseback would be "a good example of public, private partnership," he added.

WHAT'S NEXT

* The News: Barnhart recently completed construction on Del Norte High School.

* The Issue: The project came in ahead of time and under budget, largely because of a rarely used lease-leaseback construction agreement that allowed the general contractor and architect to team up in the design of the campus.

* What's Next: Barnhart is exploring the possibility of providing long-term construction financing for some school districts via the use of lease-leaseback agreements.