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The School-Building Dilemma: Is Leasing the Answer?

Some states and organizations are taking a new approach to opening schools. Can leasing buildings or enlisting private entities cut costs or at least speed up construction? Included: Descriptions of some public-private partnerships.

Conventional wisdom says mixing public and private interests can be tricky -- especially when it comes to property. But some school districts in the U.S. and Canada have experimented with ways to construct and maintain schools that involve private entities.

Called public-private partnerships, these can involve a district negotiating with a company to build a school; then the company leases the building to the district for the life of the building, about 20 or 30 years. The building owner provides most of the maintenance services.

Most places that have tried public-private partnerships have used a system that blends the traditional process -- holding a referendum for local approval to borrow money, then advertising for proposals and taking the lowest bidder -- with aspects of public-private partnerships.

"They [public-private partnerships] are starting to catch on now," said Michael Donahue, an attorney with Gadsly Hannah, a Boston law firm involved in public construction law. "The growth of the school-age population is explosive. Many cities and towns have not had to upgrade buildings. Now they do, and there is not much public money for it."

SAVING TIME, MONEY?

Donahue, who has worked with school systems in several states, said using public-private partnerships could mean schools get built more quickly and cheaply. The cost of renting a building also can be less or equal to the amount that would have been spent on construction and maintenance. "School districts are freed up from the red tape [of construction projects]," he said. "It's a new way of looking at things. It's a shift to the realization that private industry can do what the public sector always has done."

Some districts have to wait months or years for public funding to build schools when they have an urgent need for new buildings, Donahue said. States usually reimburse part of the construction costs, but money for reimbursement has been shrinking. "This way, you don't have to wait, and the town is not providing one nickel," he said.

One entity that embraced -- and then discarded -- leasing was the Province of Nova Scotia in Canada, calling the products public-private partnership, or P3 schools. In 1998, the province's Department of Education announced the signing of its first lease agreement to construct an elementary school. The school was designed, built, operated, and financed through a public-private sector partnership. The district signed a 20-year lease.

According to a press release from the department, the net leasing cost for the school was $51,529 per month. If the province had financed the school in the traditional way, by borrowing $8.05 million and repaying the loan at an interest rate of 6.5 percent over 20 years, the taxpayers would owe more than $59,000 per month.

But just two years later, the department announced in another press release that Nova Scotia was abandoning the P3 system, citing huge cost overruns for many of the projects.

According to then finance minister Neil LeBlanc, the budgets for P3 schools were allowed to increase by $32 million after contracts were signed. Last-minute design changes and unmanaged site development expenses were responsible for the additional costs, he said in a department press release.

Nova Scotia now has 39 P3 schools, most with 20-year leases, many of which will expire between 2017 and 2020, according to Bill Turpin, a spokesman for the Department of Education. P3 schools account for 14 percent of the total square footage of school buildings in the province.

U.S. VENTURES

In the U.S., some districts that have tried public-private partnerships enter the arena cautiously.

A public-private partnership is "one of many options available to school districts for providing educational facilities," according to Frances Marine, communications director for the Florida Department of Education. "The department does not track where these partnerships occur. Decisions are managed at the local district level." Marine was uncertain how many districts have tried it.

In an effort to speed up school construction in Virginia, the state legislature state legislature passed a special act, The Public-Private Education Facilities and Infrastructure Act of 2002. The act allows private developers limited access to tax-free bonds to pay for public buildings such as schools, using a provision of the 2001 federal tax cut bill.

So far school districts are using the system with "moderate success," according to Hunter Barnes, an architectural consultant with the Virginia Department of Education, support services.

While the idea behind the legislation is to encourage someone to provide the site, do the construction work, and lease the school building back to the district, most places are not doing it that way, Barnes told Education World.

"In 95 percent of cases, the school district still owns the building, bids out the work, and the counties provide the money," he said. "It's not totally a turnkey operation. The guidelines give a generic model for school systems. There are a lot of legal issues."

Part of the reason the intended public-private partnerships have not been more widely used is that the cost has been higher than expected, Barnes added.

James Copeland, an architect with Mosely Architects in Richmond, Virginia, which works with school districts, said that while public-private partnerships may not be less expensive, as hoped, they have other benefits.

"We work with contractors earlier in the process," Copeland told Education World. "The contractor is not chosen on the basis of a low bid, but based on the best value. We work with contractors from day one. The contractor assumes more responsibility. You don't have to take the low bidder; the building can be done in a reasonable time at a reasonable cost. This provides more flexibility so the job can get done more quickly."

STREAMLINING THE PROCESS

Jerry Ford, president of Ford & Associates, Inc., a financial advisory firm in Tampa, Florida, that also works in school systems, added that speeding up the process is the main benefit of public-private partnerships.

"You don't usually save money," Ford said. "The borrowing cost for the builder and developer is higher. It's more effective when you have a public-private partnership that leverages the strengths of all the parties involved. There is no private company that can borrow money at the rate of a government entity."

But among the other advantages, he said, are that "the district borrows less money and has a shortened selection process [for contractors]. School districts hire one team to do it all. You can move more quickly and have people contribute equity who normally wouldn't."

Companies that invest in school construction also gain business by building more homes near a new school, Ford said.

CHARTERS' CHOICE

One educational arena where it is easier to employ public-private partnerships is charter schools, which are not subject to district regulations.

Michelle Patton, principal of Morey Charter School, a K-12 school in Shepherd, Michigan, said the Morey Foundation, started by a local businessman, built the school building and rents it to the school for less than fair-market value. School officials pay the rent monthly, and are in the seventh year of a lease for one building and in the fourth year for another.

"We go through the foundation if we need anything," Patton told Education World. "Anything in the building, they take care of. The foundation pays for most maintenance [but] gradually, we are paying for more maintenance costs. The last few years, we paid for snow removal."

The system relieves a principal of a lot of non-education responsibilities. "It's easier for me; I don't have any concerns about the building," Patton continued. "If anything goes wrong, we know it will be taken care of."

Jason Pater, a real estate manager for National Heritage Academies, which operates a network of charter schools in five states, noted that charters have more flexibility to use different construction methods.

"We have privately financed real estate acquisition and construction," he said. "Working privately, you can build things more quickly and efficiently. Competitive bidding can add 20 to 30 percent to the cost of the project."

"We've developed a prototype design-build model," added J.C. Huizenga, founder of National Heritage Academies. "We let the builder carry the lead. We have a very efficient floor plan. We entice them to apply problem-solving skills to schools. We provide a turnkey solution; we provide employees and curriculum, we take full responsibility for the success of the school."

CHANGES COME SLOWLY

More time and testing likely are needed before more school systems choose to leave the traditional process behind.

"The [public-private] system works when used properly," said Donahue of Gadsly Hannah. "Some of the districts are cautious, because they are not sure of the legalities. There are a lot of moving parts to this."

"A lot of government officials like the way it sounds, then find it hard to follow through, and revert to the old ways," added Ford. "There is a lot of institutional resistance to being creative."

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