Public/Private Construction Projects - Part II

For the 2010 ABA Forum on the Construction Industry MidWinter Meeting, held January 27-29, 2010 in San Francisco, Guest-bloggers Bob Carney and Lisa Sparks prepared a paper on hybrid public/private construction projects. The paper, Is It Public or Not? was presented by Bob Carney at the MidWinter Meeting on Thursday, January 28. Over the course of three posts, the two of them are guest-blogging here on the BRAC Blog, reviewing the hybrid public/private projects covered in their paper and discussing the relevance of such hybrids to BRAC initiatives.

Part II

The hybrid project categories most relevant to BRAC are the Enhanced Use Leasing (“EUL”) program and the use of governmental lease of real property as a vehicle for new construction. EUL projects permit private developers to lease military base property, and are being utilized for commercial office space and hotel and retail projects at major BRAC installations such as Aberdeen Proving Ground and Fort Meade in Maryland, Redstone Arsenal in Alabama, and Fort Bliss in Texas. In the D.C. area especially, governments are also using the lease of real property from private entities as a means of funding and completing new construction projects.

Enhanced Use Leasing

Military agencies can lease property owned by the federal government to private developers under the EUL program. Under the program, an agency may lease out property on its installations and keep for itself half of the monetary rent revenues; the other half must be paid into the federal government’s general fund. But in-kind consideration – including but not limited to maintenance, repair, or improvement to other property or facilities owned by the agency -- may be provided by a developer in lieu of cash rent, and the leasing agency may keep 100% of such in-kind consideration. No matter what form the consideration takes, the property may not be leased at less than fair market value, and discounted leasebacks of EUL property to the agency are expressly forbidden under federal law.

The EUL program is being utilized to further BRAC realignment at a number of federal installations. At Fort Meade, for example, the lessee under the enhanced use lease will provide in kind consideration in the form of the construction of a new golf course, in return for its lease of the land on which the old golf course site, on which commercial office facilities for federal contractors are being built.

Governmental Lease of Real Property as a Vehicle for New Construction

Governmental units increasingly acquire newly constructed buildings, built to their specifications, through a lease for years rather than by public construction. Where the new construction is to be leased, a private entity undertakes the responsibility for financing, constructing, operating, and/or maintaining a building to be occupied by a governmental agency under a lease for years. This has the effect of shifting expenditures from a capital improvements budget to an operating expenses budget.

For example, the NIH chose to have a new biomedical research center built at the Johns Hopkins Bayview Medical Campus in Baltimore by signing a long-term lease with the private company that owned the land underlying the project. That company in turn made the arrangements for the construction of the project. However, the NIH remained actively involved in reviewing the project’s progress and changes in design. Remarkably, the private construction contract appears to make the NIH a third party beneficiary, entitled to liquidated delay damages from the construction contractor, with whom the NIH is not otherwise in privity.

Often, the underlying land is governmental property, transferred to the developer by lease or sale, with an agreement to lease back part or all of the finished building to the governmental unit. Such lease-back arrangements have at times been held to be construction procurement rather than real estate procurement for purposes of procurement law, but the cases are not entirely consistent. Recently, a Georgia federal district court found that a leaseback arrangement for new construction on the grounds of Fort Stewart, an Army installation, was not a federal construction contract and thus was not subject to the Miller Act.