In a decision that may imperil many pending school construction transactions, the Fifth District Court of Appeal has held that, to qualify for exemption from public bidding, a lease-leaseback transaction must include “a financing component” and a “genuine lease” that provides for school district use of the facilities during the lease term. Davis v. Fresno Unified School District, No. F068477 (Fifth Dist., June 1, 2015). The court determined that the contract before it did not meet these criteria and hence was subject to competitive bid requirements under the Public Contract Code.

Contracts for construction of school facilities exceeding $15,000 ordinarily must be competitively bid. An exception to public bidding exists under Public Contract Code § 17406, which provides that a district “without advertising for bids, may let . . . real property that belongs to the district if the [lease] requires the lessee . . . to construct . . . a building or buildings for the use of the school district.” Under such a “lease-leaseback” arrangement, the district leases land to the contractor on which the contractor agrees to build school facilities to be leased back to the district for a specified time and rental amount. At the end of the lease term, title to the school facilities must vest in the school district. § 17406(a)(1).

The Fresno Unified School District entered into such a lease-leaseback arrangement for construction of a $36 million middle school. Plaintiff challenged the arrangement, arguing that the contract did not create a true lease or satisfy other criteria under Section 17406, and hence was not exempt from public bidding.
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