Public/Private Construction Projects

Date: February 16, 2010

For the 2010 ABA Forum on the Construction Industry Mid-Winter Meeting, held January 27-29, 2010 in San Francisco, 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 Mid-Winter Meeting on Thursday, January 28. Over the course of three posts, Bob Carney and Lisa Sparks will review the hybrid public/private projects covered in their paper and discuss the relevance of such hybrids to BRAC initiatives.

Part I

The traditional view of construction projects conceives of these endeavors as falling into one of two mutually exclusive categories: (1) public construction - those projects for public works, paid by government funds, for which the government contracts with a construction contractor or contractors in accordance with acquisition regulations; or (2) private construction - those projects where a private entity develops the project, secures financing necessary to complete the project, and contracts for its construction.

The classification of a construction project as public or private dictates how a construction contract is let, as governmental entities typically have specific procedures for bidding and/or negotiating such contracts. It also impacts the remedies available to contractors and subcontractors. Public contracts generally involve a limited waiver of sovereign immunity on the part of the governmental entity, typically dependent on the contractor's compliance with strict claim submission requirements and characterized, at least in the early stages, by resort to administrative rather than judicial proceedings. Public lands, as a general rule, are not subject to mechanic's liens, though subcontractors are offered a rough substitute in the form of Miller Act (federal) or Little Miller Act (state and local) payment bonds.

But the strict dichotomy between public projects and private ones is breaking down. Increasingly, there are areas of gray where the two categories overlap - hybrid projects that feature some private funding, some public, and often sit on lands owned in whole or in part by a governmental unit. Many of the projects related to BRAC initiatives make use of such hybrids, most notably Enhanced Use Leasing ("EUL"), a program under which federal agencies lease federal property to private parties for development of the land.

In our next post, we will describe the hybrids most relevant to BRAC - EUL programs and the use of governmental lease of real property as a vehicle for new construction. In our third post, we will examine the effect of these hybrids on contractors' rights upstream to get paid and to enforce such rights, and on contractors' duties downstream to pay their subcontractors.

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.

Part III

The remedies available to the unpaid contractor or subcontractor on a hybrid project and the procedures by which those remedies can be enforced unfortunately remain unclear and unsettled. In many situations, it is uncertain whether mechanic's liens, prompt payment acts, or construction trust laws will apply to hybrid projects. Payment bonds on a federal hybrid project may be governed by the Miller Act, but they might instead be treated as private project bonds, governed by applicable state law, and there is no bright line test for making this determination. Presumably, as hybrids grow more prevalent, court decisions providing clarity will be handed down. Until then, it is imperative that construction contractors proceed with caution and ensure compliance with all potentially applicable notice and claims bar dates.

Mechanic's Liens

Whether a contractor can get a mechanic's lien on a hybrid project remains murky and will likely vary from case to case, depending on the specific nature of the project and, where the project is on a federal installation, whether and how the state in which the property lies consented to the purchase of such property by the federal government. The mechanic's lien is an important asset in the arsenal of a construction contractor who wants to get paid, making the real property underlying the project security for the debt owed to the contractor for his work on the property. The government's interest in real property is generally not lienable. However, where a contactor performs work on a project lying on land leased from the federal government (as in an Enhanced Use Leasing ("EUL") project), the contractor conceivably could obtain a lien on the leasehold held by the developer/lessee; most states permit such liens where the work is performed pursuant to a contract with a lessee.

But state mechanic's lien laws may not apply on federal enclaves. The application of state laws on federal enclaves within a given state is a complex issue. What follows is an oversimplification for present purposes. Article I, Section 8, Clause 17 of the U.S. Constitution provides that federal law exclusively applies on land held by the federal government for military installations "and other needful buildings" where the state legislature has consented to the purchase of such lands. Without the consent of the state legislature, in contrast, all state laws apply, provided such state laws do not intrude upon the federal government's sovereignty. States are permitted to condition their consent to the federal purchase of land, and they often do, seeking concurrent jurisdiction over the property. The states' conditions are far from uniform, and the conditions imposed by a state typically change over time (Maryland has enacted at least four different consent statutes over the last century or so, each with differing terms; the consent in effect at the time of the purchase is determinative as to application of state laws on the purchased land), so the applicability of state law on a federal installation is generally dependent upon where and when the federal government acquires the land. The bottom line is that a contractor on a hybrid project on a federal installation cannot be sure it has any mechanic's lien rights.

The contractor on a project not lying on federally owned land that will be leased to the government may have slightly better lien rights, though it can lien only the reversionary interest held by the fee simple owner; the government's leasehold cannot be liened. Moreover, where disputes arise, the subcontractor seeking to claim a lien will likely be dragged into the federal claims process under the Contract Disputes Act before it can obtain a final lien.

Contract Disputes Act

The federal Contract Disputes Act ("CDA") channels federal procurement claims through contracting officers and boards of contract appeals or the Court of Federal Claims, rather than through federal district or state courts of general jurisdiction. Its procedures are mandatory and apply to all claims by the contractor - meaning the person with a direct contract with the federal government -- on federal construction and lease contracts entered into by executive agencies. Most states have claims procedures on government contracts that bear some similarity to the CDA. Subcontracts on such governmental projects typically require the subcontractor to assist in preparation by the contractor of any claim to the government where the government is responsible for the basis of the claim, and often mandate that any other dispute resolution not be undertaken until the claim to the government is complete. This effectively drags the subcontractors into governmental dispute resolution scheme.

While the CDA could conceivably apply to the in-kind goods and services provided by a developer of an EUL project, the CDA will not typically apply to the EUL construction project itself, as that project will be undertaken pursuant to private contracts between the developer and contractors. The CDA will apply to those projects where new projects are constructed through governmental lease of real property, whether the contract is characterized as a lease of real property or as a construction contract.

Payment Bonds

Due to the cost and complexity involved, most hybrid projects will require payment and performance bonds of the construction contractor. It is not clear, however, whether such bonds will be treated as public works bonds (under the federal Miller Act or the applicable state Little Miller Act) or as private bonds. This will likely vary, depending on the specific facts involved in a given project. Whether a bond is a public works bond or a private bond determines when and how a claimant must give notice to the surety, the limitations period for a suit on the bond, what sort of damages the claimant may recover, how many tiers of subcontractors are protected by the payment bond, and in which court the suit must be brought.

The cases are not consistent as to whether a hybrid project involving the federal government is governed by the Miller Act. The Miller Act mandates the provision of payment and performance bonds "before any contract of more than $100,000 is awarded for the construction, alteration, or repair of any public building or public work of the Federal Government." Some cases, including this one decided last year by a Georgia federal court, hold that the United States must be a party to the construction contract to bring bonds issued therewith within the Miller Act. Others focus on whether the end use of the project constitutes a "public work." There is a line of cases, for example, holding that military housing projects built by contractors under construction contracts with private developers funded by private financing are nonetheless "public works" because they are intended to house American soldiers. The second approach is more likely to result in Miller Act coverage.

Prompt Payment Acts and Construction Trust Fund Statutes

For the reasons discussed in the applicability of mechanic's liens section, above, prompt payment acts and construction trust laws may or may not apply to a hybrid project. Courts are increasingly comfortable applying state prompt payment act statutes to subcontracts on a traditional federal construction project; such subcontractors have been permitted relief under the Louisiana, California, and Pennsylvania prompt payment acts, for instance. However, state remedial acts vary in scope and state legislatures may not have intended them to apply to projects on federal enclaves. A Maryland federal court, for example, has ruled that Maryland's General Assembly did not intend that its construction trust law apply to traditional federal projects on federal land.