Another option for public school districts is leasing. In leasing, districts sign contracts with private developers or other entities that own land and/or multipurpose buildings that could be used for schools. Optimally, such leases should be medium to long term, as schools would not want to move very often, and the private property owner would want to assure a return on the investment. In effect, this arrangement is a good example of a public–private partnership.
These partnerships allow communities to upgrade their public school facilities at substantially lower costs and in less time than purely governmental efforts typically require. Although few, if any, traditional public schools in Michigan have leased school buildings, many charter schools have done so.
For example, the Morey Charter School in Shepherd, Michigan has signed two leases for its buildings from a private foundation. The leases are timed to coincide with the charter renewal, so the leases are only for a few years. Maintenance agreements are negotiated annually; currently, the landlord takes care of major maintenance and repair as well maintaining well and septic systems and yard upkeep. This year, the charter school itself is taking care of snow removal.
Nova Scotia offers the clearest example of how public–private partnerships facilitate school construction. By the end of 1998, as many as 41 new schools had been either completed or approved for construction under their Public Private Partnership program. The schools are “turnkey” operations – the facility is fully operational when the lease begins, complete with all classroom furnishings, such as desks, shelves and chalkboards; computers wired to the Internet and the inter–school electronic network; furnished administrative offices; landscaping; and athletic facilities. The school system provides the teachers, aides, principal and administrative staff and maintains full control over the curriculum and all other educational services and decisions.
The chief advantages of this arrangement for Nova Scotia’s school system is the speed with which it is able to upgrade its school facilities and the average 15 percent savings it achieves through leasing arrangements with the private developers/owners. The school system leases the facilities for 20 years at a predetermined rent that is lower than the capitalized cost of construction and furnishings.
If such an approach were implemented in the United States, the potential savings could be greater than the 15 percent Nova Scotia realizes, because private financing and ownership of the structure would allow school systems to avoid additional costs imposed by federal and state mandates. Such mandates include prevailing wage laws, environmental regulations, and minority set–asides, which often add substantially to the costs of design and construction of publicly funded buildings.
Florida provides an example of such an arrangement. Using an approach similar to Nova Scotia’s plan, plus money provided by the community to build the school, the per–student construction costs for a single charter school in Florida fell between 22 percent and 34 percent below the state average for constructing public elementary schools. These savings were due largely to a series of innovative design efficiencies.
If school districts want to lease facilities, they should be especially mindful of four important issues. First, leases should be at least three to five years, and even longer if the lease provisions are sufficiently good for the school district. In return for a 10 to 20 year lease, most districts should be able to have a new school built, since the developer should be able to recoup the cost of the building in that amount of time.
A second issue to consider is maintenance. One of the allures of leasing is that if the facility becomes rundown or otherwise unacceptable for educating children, then the district does not have to sign another lease. Facility maintenance can and should be negotiated either into the lease or negotiated competitively with an outside company. Most property owners would insist on this, as they have a financial interest in the upkeep of the property. In the Morey Charter School case, the owner does most of the maintenance work.
Third, lease costs should not be financed through bonding. Rather, they should be paid out of current operational funds, the same way as debt service would be paid if a new building were financed through bonds. Capitalizing lease payments through bonding defeats the potential cost savings of leasing, as school districts would have to pay interest on top of the full–capitalized cost of the lease.
Finally, an obscure provision of the 2001 federal tax cut bill allows private developers limited access to tax–free bonds to pay for this kind of building activity. Michigan could allow up to roughly $10 million worth of these bonds to be used for school building purposes, but this would likely require a vote of the Michigan legislature. Other states, such as Virginia, have enacted such legislation.
In short, leasing may be less expensive than buying, and leasing space protects school districts from future enrollment changes and allows flexibility in facility acquisition. Leasing also has the advantage that the private sector may be able to provide these facilities more efficiently than the public sector. On the negative side, leasing assures building expenses in perpetuity, while school bonds used for purchasing buildings will be paid off after a length of time.