New Approaches to School Funding

If there is always a better way to build the proverbial mousetrap, does this extend to something as complex as building a school facility?

One man who responds to a positive yes to this question is Stephen Swisher, AlA, a partner with Raymond Garfield, Jr. and Tony Traub of Swisher Garfield Traub Development, based in Dallas, TX, with an office in Las Vegas, NV.

As opposed to the traditional methods that go under the names of pay as you go, general obligation bond financing, private (taxable) lease-lease back, design-bid-build, construction manager at-risk, and design-build, Swisher offers an alternative that, happily, is much simpler in practice than its title: developer led turnkey lease-purchase project delivery program.

Before exploring the new way, let’s first look at how Swisher describes the old way.

Typically, every three to five years a district will hold a referendum and go out to the voters to fund a bundle of projects. When the voters approve it, it then goes through a general obligation process. This typically requires school districts to go through a very detailed delivery procedure for interviewing and selecting architects. It can take a year or more to complete the contract documents. Then it takes 90 days or more to go out to bid. This requires the owner to select the lowest bidder without review of the subcontractor bidder and pricing. Since prices are usually developed in a vacuum without input from construction contractors, the costs often turn out to be more than projected. If the actual costs are more than 10 percent off the estimates, then the drawings have to be redone and rebid. It’s not unusual for there to be bid protests, which can take a month or more to resolve.

The very nature of the bidding process puts the contractor who wins the job under pressure right at the start. First, he’s gotten the job by offering the lowest possible price. Now he has to make good within a tight time-frame. What then often results, not sur¬prisingly, are delay claims, change orders, and repeated RFIs (requests for information). The general contractor, falling behind, delays paying his subcontractors as long as he can. All of this Swisher concludes, makes for an adversarial relationship, in varying stages of digression, between one or more segments of the building process — owner, developer, architect, general contractor, and subs.

The new concept started to evolve about 10 years ago when Garfield and Traub got together. Garfield’s background was in Wall Street, and Traub’s in building hotel conference centers and other major commercial and residential developments. This led to an innovative connection between private investing and public facilities. Swisher brought an added dimension to the firm when he joined it a couple of years ago for education-related projects. For, in addition to being an architect for one of the larger firms in Nevada, he was the immediate past president of the Council of Educational Facility Planners Inter¬national (CEFPI). So, what started as the utilization of private invest¬ment for public facilities such as the Washoe County Public Safety Training Facility, Reno, NV, and New York State DOT Region 1 Head¬quarters, Schenectady, NY, expanded to educational projects such as the Los Angeles Unified School District Primary Centers and the College of Southern Nevada Northwest Campus, Las Vegas.

There are also a number of different ways in which the city and school can be interrelated. For instance the Durham Performing Arts Center, in North Carolina, is sponsored by the City of Durham with support from Duke University. The Hotel and Conference Center at Texas Tech University is sponsored by the City of Lubbock, but it’s adjacent to the university, which uses it as a training and intern center for its hospitality program.

The way this turnkey program works, in a nutshell, is that the developer, Swisher Garfield Traub, attracts private investors and raises the money. The money is then transferred into a
nonprofit, tax-exempt organization especially set up for the purpose. It’s this nonprofit entity that becomes the borrower of the funds, which is why it’s tax exempt. The bonds, raised through the developer’s investment banking partners, are sold on Wall Street. The bonds are retired through lease payments from the school over a 30-year period.

There is no buyout at the end. In fact, the school owns the building from day one because it owns the nonprofit organization. “The financing costs are competitive with general obligation bond rates,” Swisher says. But there are other advantages. For instance, he says, “Interest costs 35 percent less than conventional financing.” No public referendum is required. There is no sales or property tax. And the lease can include maintenance or capital replacement reserves.

Not only is the project owner, or school, controlled, but the single source of responsibility is the developer. The school holds a single contract for the developer, architect, engineering, and construction. “This minimizes school staffing,” Swisher says. “For the school doesn’t have to referee all of the conflicts usually involved in construction.”

The reason these conflicts are eliminated, Swish explains, is that the developer, architect, engineers, and contractors are all on the same team. They all have a similar alignment of interests. There is no need for a separate selection process for an architect or a “bridging” architect. Concurrent contractor pricing eliminates time and expense for re-bidding. “Gone are delay claims, RFI games, and change orders,” Swisher says. He adds that the most qualified team is chosen at the start, and they have a great motivation to work together. Subcontractors can be chosen through the bidding process. But here the best price can be matched with the best quality.

This turnkey tax-exempt approach is just beginning to emerge in schools throughout the country, Swisher says. California, New Mexico, North Carolina, West Virginia, and Maryland are among the pioneers in this arena. “What’s interesting from the legal standpoint it’s that it’s legal in most states,” says Swisher. “It’s just never been done before.” What is happening to a degree is that a clarification process is involved, and some states need amended legislation to make sure it is workable. But Swisher adds, “There is more and more approving legislation every year.”

Any resistance? Swisher says that all segments of the building community favor the process since it eliminates the adversarial aspect. “The only resistance we’ve found in schools is the normal time it takes for the various people in the school district, the board, administrators, CFOs, and attorneys to under¬stand the process. It’s a bit of a learning curve, but once they see the advantages, they’re for it.”

One of the key advantages is that this turnkey method allows construction to start a year earlier than it would otherwise. This means that a project that, in conventional methods, would cost over $240M in 30 years would, under this method, cost $100M.