Does an Arkansas school district have to put a long-term lease-purchase deal with a private developer out for public bid?

Plain-English summary

Act 2177 of 2005, codified at Ark. Code Ann. § 6-20-402, lets Arkansas school districts enter long-term lease-purchase agreements with private developers. The developer builds (or renovates) the school facility, leases it to the district for years, and after the lease term conveys it to the district. Representative Andrew Collins asked the AG seventeen questions on how the program interacts with bidding rules, school-board fiduciary duties, and constitutional limits. Attorney General Leslie Rutledge worked through them.

The bottom line:

• No public bidding is required for the lease-purchase agreement itself, the developer's construction work, or any sale or assignment of the developer's interest. Section 6-20-402 does not impose bidding requirements on these transactions.
• The developer is not bound by school-district statutes and constitutional provisions simply because it is contracting with a school district. Article 14's mandate to maintain free public schools and § 6-13-620's school-board duties bind the district, not the developer. But practical compliance with the Arkansas School Facilities Manual under § 6-20-402(b)(1)(C)(iii) is necessary for the developer to deliver an acceptable building.
• Selling improved school property to a developer at nominal price can violate the constitution. Article 14, § 2 prohibits diverting school property. Article 16 prohibits illegal exactions. Adequate consideration is required; nominal-price sales risk treatment as donations.
• Subleasing unused portions of a developer-owned project to third parties for non-school purposes is permitted with school-district consent, under § 6-20-402(b)(1)(D)(i).
• Off-balance-sheet treatment under § 6-20-402(b)(1)(C)(ii)(b)(1) is available where the lease grants the district the right to terminate at the end of any fiscal year. A right to terminate at any time qualifies because that subsumes year-end termination.

The school board's wide latitude under § 6-13-620 (Safferstone v. Tucker) means courts will defer unless the board acts arbitrarily or abuses its discretion.

Currency note

This opinion was issued in late 2021. Act 2177's text in § 6-20-402, the school-board powers in § 6-13-620, and the surrounding statutes may have been amended, particularly after the 2023 LEARNS Act. Verify the current statute before relying on this analysis to structure a deal.

What this means for you

If you are a school district considering an Act 2177 lease-purchase

Based on this opinion, the lease-purchase mechanism gives you flexibility on bidding, off-balance-sheet treatment, and developer relationships. The strict guardrails are constitutional: any sale of school property to the developer must rest on adequate consideration. A "nominal cash" sale is constitutionally vulnerable; structure the transaction so that improvements built and conveyed back to the district plus rent payments add up to fair value.

If you are a developer building school facilities under Act 2177

You are not bound by school-district bidding statutes or general constitutional school-funding requirements. You do need to deliver buildings that meet the Arkansas School Facilities Manual under § 6-20-402(b)(1)(C)(iii), since the district cannot accept a building that fails that standard. You can sublease unused portions of the project with district consent. You can sell or assign your lease-purchase interest without a public bid.

If you are a school board member voting on a deal

The school board has wide latitude under § 6-13-620 and Safferstone v. Tucker. Courts will defer unless the board acts arbitrarily, capriciously, or contrary to law. But "wide latitude" does not insulate you from illegal-exaction litigation if you sell improved school property at nominal price. Document the consideration: the developer's improvements, the lease term, the conveyance back, and any reverter rights.

If you are a bond counsel structuring the financing

Pay attention to the year-end termination mechanism in § 6-20-402(b)(1)(C)(ii). A lease with an annual termination option is excluded from the school district's debt ratio calculation. A lease without that option is included. The opinion confirms that an at-any-time termination right also qualifies for off-balance-sheet treatment.

If you are a parent or watchdog reviewing a proposed deal

The constitutional concerns are real but specific: nominal-price sales of school property and donations of school assets to private parties. Lease-purchase mechanics with adequate consideration are permitted. Look for a clear consideration statement and a pathway to district ownership at the end of the lease.

Common questions

Q: What is Act 2177?
A: Act 2177 of 2005, codified at Ark. Code Ann. § 6-20-402, authorizes school districts and public charter schools to enter "public-private partnerships" for the acquisition or construction of school facilities through long-term lease-purchase agreements. Private developers build (or renovate) facilities, the school district leases them, and ownership transfers to the district after the lease.

Q: Why doesn't this trigger bidding rules?
A: Because § 6-20-402 does not impose bidding requirements, and the general public-improvement bidding statute (§ 22-9-203) applies to contracts the school district enters for projects exceeding $50,000, not to a private developer's separate construction work. The developer is the contracting party with builders; the district is the lessee.

Q: What's the off-balance-sheet rule?
A: Per § 6-20-402(b)(1)(C)(ii), a long-term lease with an annual fiscal-year termination option is excluded from the school district's debt ratio. A lease without that option is included. The opinion clarifies that an "at any time" termination right is broader than fiscal-year-end and therefore qualifies.

Q: Can a school district sell its land to a developer for $1 and lease it back?
A: Per this opinion, that structure is constitutionally suspect. Article 14, § 2, prohibits diverting school property. The court would look at whether nominal cash plus other consideration (improvements built, lease terms, return conveyance) adds up to adequate consideration. Pure nominal-price sales without offsetting consideration likely fail.

Q: Can the developer sublease unused parts of the school to a third party?
A: Yes, with school-district consent. Section 6-20-402(b)(1)(D)(i) allows subleasing during periods when the school district is not using the facility for educational purposes. The school board still has fiduciary obligations under Article 14 and § 6-13-620, so it must approve only subleases consistent with its school-funding duties.

Q: Does the developer have to comply with school-district legal requirements?
A: Generally no. The developer is a private party. The district remains responsible for fulfilling Article 14 and § 6-13-620 obligations and must structure its deal so the developer's actions do not put the district in breach.

Background and statutory framework

Act 2177 was the Arkansas legislature's response to a need for flexibility in school facility financing. Districts often needed new buildings or renovations but lacked bond capacity or wanted to keep facilities off the balance sheet for debt-ratio purposes. The public-private partnership structure, with a developer using tax-exempt facilities bonds, lets the district pay over time without triggering debt-ratio limits, provided the lease has an annual termination option.

The statute establishes the framework but leaves operational details to the district and developer. The AG's opinion clarifies that the framework does not bring along the typical bidding statutes that apply to direct school-district construction projects, and that the developer is not a state actor for purposes of school-district constitutional obligations.

The constitutional limits the AG flagged sit in Article 14 (school-property and school-funding protections), Article 16 (illegal exactions), and Article 2, § 8 (due process and prohibition on diverting public funds to private purposes). They reach the school district's actions, not the developer's. The risk in any Act 2177 deal sits in how the district structures the property transfer.

The opinion also reinforces a recurring theme in Arkansas school-board law: under Safferstone v. Tucker (1962) and Springdale Bd. of Educ. v. Bowman (1987), courts give school boards "wide latitude" and intervene only on a showing of arbitrariness or abuse of discretion. Districts have room to negotiate.

Citations and references

Constitutional provisions:

• Ark. Const. art. 14 (free public schools mandate)
• Ark. Const. art. 14, § 1, § 2, § 3(c)(3) (school funding and prohibition on diversion)
• Ark. Const. art. 16, § 11, § 13 (illegal exactions)
• Ark. Const. art. 2, § 8 (due process; no public funds for private purposes)

Statutes:

• Ark. Code Ann. § 6-13-620 (school board powers and duties)
• Ark. Code Ann. § 6-20-402 (Act 2177 lease-purchase framework)
• Ark. Code Ann. § 6-21-108 (school property donation criteria)
• Ark. Code Ann. § 22-9-203 (public improvement bidding)

Cases:

• Edwards v. State, 347 Ark. 364, 64 S.W.3d 706 (2002) (cardinal rule of statutory construction)
• Weiss v. McFadden, 353 Ark. 868, 120 S.W.3d 545 (2003) (plain-meaning rule)
• Wells v. Purcell, 267 Ark. 456, 592 S.W.2d 100 (1979) (Arkansas Constitution as limiting document)
• Jones v. Mears, 256 Ark. 825, 510 S.W.2d 857 (1974) (limiting nature of state constitution)
• Black v. Cockrill, 239 Ark. 367, 389 S.W.2d 881 (1965) (legislative authority within constitutional limits)
• Gatzke v. Weiss, 375 Ark. 207, 289 S.W.3d 455 (2008) (presumption of constitutionality)
• Ford v. Keith, 338 Ark. 487, 996 S.W.2d 20 (1999) (presumption of constitutionality)
• ACW, Inc. v. Weiss, 329 Ark. 302, 947 S.W.2d 770 (1997) (presumption of constitutionality)
• Springdale Bd. of Educ. v. Bowman, 294 Ark. 66, 740 S.W.2d 909 (1987) (school board discretion standard)
• Safferstone v. Tucker, 235 Ark. 70, 357 S.W.2d 3 (1962) (judicial deference to school board governance)
• Chandler v. Bd. of Trustees of Teacher Ret. Sys., 236 Ark. 256, 365 S.W.2d 447 (1963) (no public funds for private purpose)

Source

• Landing page: https://arkansasag.gov/divisions/opinions-foia/attorney-general-opinions-search/

Original opinion text

Opinion No. 2021-052
December 17, 2021

The Honorable Andrew Collins
State Representative
P. O. Box 21473
Little Rock, AR 72221

Dear Representative Collins:

This is in response to your request for an opinion regarding the authority of a school district to use provisions of Act 2177 of 2005 to finance the acquisition of either new school buildings or improvements to existing school buildings.

In this regard, you have provided the following factual scenario:

Act 2177 authorizes private contractors/developers ("Developers") to construct school buildings, facilities and improvements ("Projects") and, thereafter, lease them to school districts for long periods of time. In certain instances, it is contemplated that the Developer will build a new Project meeting those specifications that the school district might identify and, upon completion of construction, the school district will then lease the facilities from the Developer over a long period of time. In other instances, the school district might opt to sell to the Developer existing facilities that will then be leased back from the Developer once material renovations have been performed. In both instances, upon the payment of all rent due under the lease agreements, it is contemplated that the Developer will convey the improved property to the school district absent further consideration.

I have set out your 17 questions below, and will address them in the order posed.

Question 1: Is a school district required to engage in any public bidding or any other procurement process in connection with its execution of a Project development agreement with a Developer?

Question 2: Because a private Developer will be constructing the Project, must the Developer follow any public bidding or procurement laws?

Question 3: Is a school district required to engage in any public bidding or any other procurement process as a condition precedent to its execution of a Project lease agreement with a Developer?

Question 4: With regard to the above three questions, if applicable, what are the public bidding or other procurement processes that the school district must follow?

I have grouped these questions together because they all concern bidding requirements. The answer to each of the first three questions is "no." Accordingly, no response to Question 4 is necessary.

Your questions regarding Act 2177 of 2005 ("the Act") implicate certain portions of Ark. Code Ann. § 6-20-402 (Supp. 2021). This statute, as amended by the Act, authorizes school districts to enter into lease-purchase agreements through "public-private partnerships":

A school district or public charter school [collectively herein, "school district"] may enter into public-private partnerships whereby the school district or public charter school enters into a lease-purchase agreement for the acquisition or construction of a school building or related facilities built or acquired by the private entities with facilities bonds [that are exempt from certain federal taxes].

Other relevant portions of the statute concern aspects of the lease-purchase agreement between the school district and a developer, such as the term of the agreement and the provision of an option by the school district to terminate the agreement.

A cardinal rule of statutory construction is that a statute is construed just as it reads, giving the words their ordinary and usually accepted meaning in common language. When the language of the statute is plain and unambiguous, there is no need to resort to rules of statutory construction.

It is unclear from your first and third questions what part of a lease-purchase agreement, as contemplated by the statute, would need to be put out for public bid. Nevertheless, based on the rules set out above, I do not see anything in section 6-20-402 that requires a school district to engage in public bidding to enter into a lease-purchase agreement with a private developer.

With respect to your second question, nothing in the relevant statute requires a private company to engage in public bidding merely because it has an agreement with a public entity. Thus, the answer to your second question is "no," and no response is necessary to Question 4.

Question 5: Is a Developer required to engage in any public bidding or any other procurement process as a condition to Developer's construction of a Project and granting a leasehold interest in the Project to a school district pursuant to a lease agreement?

Question 6: If so, what are the applicable public bidding or other procurement processes that the Developer must follow?

Please see my response to your second question above. A response to Question 6 is unnecessary in light of this response.

Question 7: Must a Project Developer comply with statutory and constitutional provisions applicable to the school district?

It is not clear which statutory and constitutional provisions you are referencing. But given the context of your question, I gather that you are asking whether entering into a long-term lease-purchase agreement with a school district somehow makes a project developer subject to all or some of the same constitutional and statutory provisions as the school district. In short, the answer to your question is "no."

There are certainly constitutional and statutory provisions that would guide and constrain the actions of a school district engaged in a public-private partnership with a project developer. Namely, Article 14 of the Arkansas Constitution requires the State to "maintain a general, suitable and efficient system of free public schools . . . ." In furtherance of this constitutional directive, the General Assembly has charged the board of directors of each school district with a number of powers and duties "in order to provide no less than a general, suitable, and efficient system of free public schools." Thus, a school district board of directors would need to remain mindful of these obligations when considering entering a public-private partnership under subdivision 6-20-402(a)(1)(B). But the developer itself would not be subject to these requirements.

Additionally, while I cannot speak to all statutory provisions that might apply to a project developer, it is worth noting that with respect to the long-term lease-purchase agreements described in subdivision 6-20-402(a)(1)(B), "[a]ll school buildings or related facilities shall comply with the requirements of the Arkansas School Facilities Manual in effect at the time the lease became effective." This provision does not impose a mandate on the developer per se. But as a practical matter, a developer wishing to enter into a long-term lease-purchase agreement with a school district would need to ensure that buildings or facilities leased to the district meet the necessary requirements.

Question 8: Does a school district possess the statutory and constitutional right and power to enter into a Project lease agreement with a Developer?

Question 9: If not, what are the statutory and/or constitutional provisions that prohibit or limit the school district's right and power to enter into such a Project lease agreement?

I will respond to these interrelated questions together. As explained above, section 6-20-402 sets forth a scheme whereby a school district may enter into a lease-purchase agreement with a project developer. Thus, a school district does possess the statutory authority to enter such an agreement.

With respect to whether a similar constitutional provision exists, the answer is "no." There is no express right in the constitution for a school district to enter into a lease-purchase agreement with a developer. However, the absence of such a provision does not bear on the constitutionality of section 6-20-402. The Arkansas Constitution is a limitation on, not a grant or enumeration of, the powers of the State. As such, the General Assembly may enact legislation subject to the restrictions and limitations imposed by the state and federal constitutions. Furthermore, it is a well-established rule of construction that laws passed by the General Assembly are presumed to be constitutional unless judicially declared otherwise. In this case, the legislature has statutorily authorized an arrangement that allows a school district to enter into a lease-purchase agreement with a project developer, and there are no obvious constitutional defects on the face of the statute.

Question 10: Must a Developer participate in any public bidding process in connection with the Developer's subsequent sale and assignment of a Project lease agreement to a third party?

No. Until the conclusion of the lease-purchase term, ownership of the project belongs to the Developer. And nothing in the statute prevents the Developer from selling or assigning its interest in the lease-purchase agreement. Furthermore, and similarly with Questions 2 and 5 above, nothing in the statute suggests that the Developer must put its interest in the lease-purchase agreement up for public bidding prior to transferring or assigning that interest to a third party.

Question 11: Do any applicable statutory or constitutional provisions prohibit a Developer from leasing certain parts of a Project to third parties for non-school district purposes, during summer months and during non-school hours with the express prior consent and approval of the school district?

Given that school buildings and facilities may still be used by a school district during summer months and non-school hours, I gather that this question is asking about leasing certain parts of a project to third parties when those buildings or facilities are not in use by the district. With this understanding, the answer is "no."

Subdivision 6-20-402(b)(1)(D)(i) states that "[a] school district may sublease a portion of a school building or facility whenever that building or facility is not being used for educational purposes." Hence, a project developer may not prohibit a school district from subleasing an unused portion of the project if the school district wishes to do so. Nor does anything in this statute prevent a developer from subleasing certain unused portions of the project if the school district gives its consent.

The board of directors of a school district that is considering whether to approve of a developer's sublease would need to bear in mind the district's own obligation to provide "a general, suitable, and efficient system of free public schools," including its duty to ensure that "[n]ecessary and sufficient facilities are built or obtained, furnished, and maintained . . . ." But the Arkansas Supreme Court has long interpreted section 6-13-620, which defines a school board's powers, as granting school boards wide latitude in governing their districts, stating that "[c]ourts will not interfere in matters of detail and government of schools, unless the officers refuse to perform a clear, plain duty, or unless they unreasonably and arbitrarily exercise the discretionary authority conferred upon them." Thus, absent a showing that a school board has somehow abused its discretion by allowing a developer to lease out unused portions of the project to a third party, a court would likely find such an arrangement permissible.

Question 12: Can a school district convey improved real property to a Developer for nominal cash consideration pursuant to an agreement whereby the Developer will construct material improvements thereon and lease the improvements back to the school district?

Question 13: If not, what are the statutory and/or constitutional provisions that prohibit or limit the school district from selling improved real property to a Developer?

The factual nature of your question prevents me from answering with a simple "yes" or "no." My response must therefore be limited to a discussion of what legal principles bear on a school district's ability to convey real property.

Section 6-13-620 explicitly grants school boards the authority to sell real property on behalf of the school district. And while school districts must obtain bids prior to making certain purchases, there is no bidding requirement under state law constraining a district's disposition of its property. Furthermore, school boards are empowered to "[d]o all other things necessary and lawful for the conduct of efficient free public schools in the school district." As explained above, this statute also grants school boards considerable latitude, and courts will generally only set aside a board's action if it has abused its discretion or acted arbitrarily, capriciously, or contrary to law.

That said, a school board's discretion regarding the disposition of school property is also constrained by several constitutional provisions. Article 14 of the constitution prevents the diversion of school property or funds for non-school purposes, and Article 16 prohibits illegal exactions. Additionally, the Arkansas Supreme Court has held that a school district's diversion of public funds to a private party may violate the due process clause of Article 2, section 8 of the constitution.

Whether the proposed agreement you describe violates any constitutional or statutory provisions necessarily depends on all the surrounding facts and circumstances. If the consideration offered for the property is so minimal that the transaction is effectively a donation, it would probably be unlawful. Moreover, such a donation would also likely run afoul of certain statutory provisions. Similarly, if the arrangement is not a donation but the consideration offered is inadequate, the sale may still constitute an unconstitutional diversion of school property or funds. On the other hand, the proposed agreement might include certain conditions that a reviewing judge would find constitute adequate consideration, in which case the conveyance could potentially withstand legal scrutiny.

In sum, whether or not a school board may legally convey school district property to a project developer is a question that will ultimately depend on a number of factual variables, and I cannot satisfactorily answer your question in the abstract.

Question 14: Can a school district acquire a leasehold interest in a Project from a Developer in accordance with applicable statutory and constitutional provisions?

Question 15: If not, what are the statutory and/or constitutional provisions that prohibit or limit the school district from leasing a Project from a Developer?

Yes, Arkansas law permits school districts to enter into lease-purchase agreements and acquire a leasehold interest in a project as defined by the agreement.

As to your constitutional question, I refer you to my response to Questions 8 and 9 above.

Question 16: Do any statutory or constitutional provisions exist that would prohibit the Developer from entering into a third-party property and facilities management contract with regard to a Project?

Section 6-20-405 is silent on this issue, and there are no other statutory or constitutional provisions that explicitly prohibit a developer from entering into a third-party property and facilities management contract with regard to project buildings or facilities. However, as explained above, section 6-13-620 charges the board of directors of each school district with certain powers and duties, based on Article 14's mandate that the State "maintain a general, suitable and efficient system of free public schools."

These duties include "overseeing and monitoring the school district finances, including . . . [e]xpenditures, [i]nvestments, . . . and [r]eal property" and ensuring that "[n]ecessary and sufficient facilities are built or obtained, furnished, and maintained." Because there is no ownership requirement attached to these obligations, a school district that has entered a lease-purchase agreement with a developer under subdivision 6-20-402(a)(1)(B) would still be responsible for making sure the project's buildings and facilities are properly managed, furnished, and maintained. Thus, if a developer enters a third-party property and facilities management contract with regard to a project, and the third party fails to adequately manage the property, the school district leasing the project from the developer could be in violation of its statutory duties.

In sum, there is no express prohibition on a developer hiring a third party to manage a project's property and facilities. But when negotiating a management contract, the school district leasing the project must be mindful of its duties under section 6-13-620.

Question 17: If a Project lease agreement contains an express provision pursuant to which the school district would have the right to terminate the lease agreement at any time and without any penalty, would the school district have the right to exclude its Project lease liability as long-term indebtedness on the school district's balance sheet and included within the school district's debt ratio calculations as provided by the provisions of Act 2177?

Subdivision 6-20-402(b)(1)(C)(ii) states that a long-term lease-purchase agreement allowed under subdivision 6-20-402(a)(1)(B) "[m]ay contain a provision allowing the school district an option to terminate the agreement at the end of any fiscal year for the school district." If the long-term lease contains such an option, it "shall not be included in the calculation of the debt ratio applicable to that school district."

In light of this subdivision, I gather your question is whether a lease containing a provision that grants the school district an option to terminate the agreement at any time, not just at the end of the fiscal year, would still meet the requirements of subdivision 6-20-402(b)(1)(C)(ii), thus allowing the school district to exclude the lease from the debt ratio applicable to that school district. The answer is "yes." If a long-term lease-purchase agreement contains a provision that allows the school district to terminate the lease at any time, that provision would also necessarily allow the school district to terminate the lease "at the end of any fiscal year."

Sincerely,

LESLIE RUTLEDGE
Attorney General