Real Estate Quarterly: Making the Grade

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It’s bigger than Boston’s $14.6 billion Big Dig and dwarfs the potential $5 billion westward expansion of the Metropolitan Transportation Authority’s subway down Wilshire Boulevard.To read the full Real Estate Quarterly, including specific breakouts of individual markets,


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It’s the Los Angeles Unified School District’s $20 billion school building program by some measures the most expensive municipal project in the country’s history. The district is constructing 132 schools, renovating hundreds more and adding a total of 180,000 classroom seats.


Funded by four bond measures, the seven-year-old construction project is in full tilt. And it’s pumping money and business into the local economy at a time when the area needs it, with construction not expected to wrap up until 2012.


“This was really a chance for L.A. to deal with its most important infrastructure need, which was quality education facilities,” said Ron Bagel, the facilities services division’s director of real estate.


When the program is complete, the district will have grown from 878 schools to 1,010, and hundreds of thousands of students will be out of bungalows and returned to traditional two-semester schedules, no longer having to take classes in the summer.


Most importantly, the district’s worst and most overcrowded schools will have first-class facilities, something educators believe is critical to the district’s long-term efforts to improve student performance.


But the plan is not without hiccups.


Some critics contend the district has moved too fast with its construction program, creating giant warehouse schools in a headlong rush to complete projects.


More threatening, a staggering rise in construction costs has forced LAUSD to curtail the program from three years ago, when 160 new schools were envisioned. It turns out $20 billion may not be enough when demand for steel and other raw materials from emerging economies such as China has run construction costs up 150 percent to $500 per foot.


In recent months, the district has “unfunded” 18 schools, cancelled expansions at some existing sites and decided to downsize others across the city. Just last week five more planned schools were downsized. One potential saving grace: The district has seen an unexpected 7 percent decline in enrollment since 2003 that might lessen some of the need.


“We are still concerned about funding,” said Edwin Van Ginkel, senior development manager of new construction for the district. “We don’t know if we’ve seen the peak in the marketplace. We don’t know if we’ve stabilized.”



Big benefits


Despite the growing pains, the landmark project likely couldn’t come at a better time: The average school in the district, the nation’s largest behind New York City, is about 50 years old. Many of the buildings are not only outdated but downright shabby.


“When those bathrooms are in bad shape and when there is no grass and the lights don’t work and it’s cold, the message is: ‘We don’t care about you,'” said Steve Soboroff, president of Playa Vista Capital Co., which is developing the Playa Vista community where the district is building a K-8 school.


But while the primary goals of the building program are obviously academic, the project could provide a boost to the flailing real estate economy, which has been hit hard on the residential side amid signs the slowdown is moving into the commercial sector.


The district is spending $12.6 billion on new construction and $7.7 billion on renovating existing buildings. So far, 9 million square feet of new school space has been delivered and when the project is completed, there will be over 20 million square feet of new space.


“A lot of the building during the boom happened in the Inland Empire and this is building in L.A. It could be that some of the people that were working out there and lost their jobs are now working on these projects,” said Gary Painter, director of research at the USC Lusk Center for Real Estate.


Painter added that studies indicate that new or substantially rehabilitated schools in distressed neighborhoods can change the character of those places.


“Schools can certainly be part of the fabric of the community. The sites can be used for other services. If you look at it with a 20-year time horizon it makes sense,” he said.


The plan has already had a notable impact on small businesses that take on work with the school district. While larger companies like Turner Construction Co. and architects like Johnson Fain Partners get big contracts, the impact on small businesses may be more significant.


According to the district’s facilities services division, 16,575 projects of varying degrees in size and scope have been completed at existing schools, with about 3,500 more projects planned. And since many of the renovations to existing schools have required a variety of small repairs and upgrades, it often makes sense to go to small businesses to get the job done.


Since the 2003-04 fiscal year, $1.46 billion in construction contracts have been awarded to small businesses.


“These smaller projects are a way to encourage smaller contractors,” said Guy Mehula, chief facilities executive for the district.


Kevin Ramsey, owner of Compton-based Alameda Construction Services Inc., does concrete work for LAUSD and has worked on about 10 schools over three years. For Ramsey, the average job has a $150,000 price tag.


“There are local businesses up to the task so they should be sought out,” said Ramsey, who added that work with the district has constituted about 50 percent of his business.


Bill Yang of construction management firm Yang Management of Burbank said that his company has worked on over 200 schools since 1997. He said that work with the district constitutes 70 percent of his business.



Complex management

But getting all this work done has not been easy. Since the program is so large, it requires intensive and extensive management. Everything from purchasing land for development to awarding contracts requires a significant amount of oversight.


“We are bound by constrictions within the public contracting code, which make things a bit more difficult,” said James O’Reilly, director of construction for the facilities services division.


The code requires that the district give contracts to low bidders who meet the project criteria. But since 2002, LAUSD has implemented a “best value procurement” program when it takes complex and more expensive projects to bid.


This program allows the district to choose contractors based on the “quality of materials, small business enterprise participation and previous successful school construction experience.” The program is allowed for under a longstanding part of the education code.


The district maintains that big companies like Hensel Phelps Construction Co. and PCL Constructors Inc. wouldn’t work with the district without the best value procurement program. “Five years ago people didn’t want to work for LAUSD because it had a reputation as a poor owner,” O’Reilly said. “We’ve worked really hard to change that.”


Still, some of the real estate professionals that have worked with the district believe that the district still presents a lot of red tape. “They have levels of bureaucracy and checks and balances that they have to go through, and it takes just a little bit longer because of the t’s to cross and i’s to dot,” said Bob Safai of Madison Partners, a commercial real estate broker who handled the $22.5 million bankruptcy sale of the Granada Hills Community Hospital development site to the district in 2004.


And every delay costs money. A lethal combination of heavy global demand for materials and several natural disasters, including Hurricane Katrina, has made construction considerably more costly.


These days, it costs around $500 per foot to build a school, and sometimes more. Van Ginkel said projects that were put out to bid in 2002 and 2003 cost about $200 per square foot to build.


Ramsey said that costs for concrete, for example, are up from about $70 per yard to $100 per yard and those increases are being passed along to the district.


While a 150 percent increase in construction costs is nothing to sniff at, a decline in enrollment could lessen the blow. The district serves about 695,000 students, which is down from an all-time high of about 750,000 five years ago.


Enrollment declines have been chalked up to a variety of factors, including lower birth rates and the subprime boom, which allowed some lower-income families that had been renters to pursue homeownership by moving out of state or to areas like the Inland Empire.


But the birthrate decline is over, according to Van Ginkel, and anecdotal information suggests that some of the families that left the area with subprime loans in tow have now lost their homes in the ensuing meltdown and are moving back.



Bigger questions


Still, there is a concern in some circles that the district has mismanaged the program on a larger level. Detractors chiefly cite fund allocation and the design of new schools as flaws in the massive program.


“They took a very limited definition of the task, which was build more seats and get the kids off the buses,” said David Abel, chairman of New Schools Better Neighborhoods, a non-profit organization that advocates for schools as community centers. “They missed out on things that could’ve been done with that $20 billion making schools the anchor in the inner-city neighborhood.”


Abel contends the large schools the district is building create “anonymity,” so that there aren’t “cultural connections and we don’t get the results we want.” And because communities are starving for new classrooms, they often are willing to accept flawed schools, though community groups have sued to stop some of the new schools.


“(The district) waits until the very end and they present the solution and you get to pick the color and you can’t change a damn thing or you’ll blow another three years,” Abel said. “Faced with those choices, you go with them.”


Meanwhile, some critics are seizing on the decline in enrollment to hold up some construction. In Echo Park, a long legal battle has been waged over a proposed $59 million elementary school. The opponents say enrollment declines at nearby Rosemont Elementary School make it unnecessary.

For his part, Mehula said that detractors of the building program should take another look at the size of the schools and the way they work within communities, noting they are open beyond school hours.


“The buildings that we are building are smaller than the existing schools,” he said. “All the secondary schools are breaking the schools into small learning centers. We are able to get that personalized learning experience.”


Soboroff, who was on a committee that oversaw spending on the first $2.4 billion bond measure in 1997, said he believes the district has come a long way in its management of the program and is delivering real results to communities.


“It’s like an Olympic dive it’s not just your dive, it’s the degree of difficulty. The degree of difficultly here is off the charts,” Soboroff said. “Based on the realities of everybody wants schools but nobody wants a school across the street, the degree of difficulty is huge and the product they are turning out is world class.”

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