By Kathrine J. Hart

In Azusa Land Partners v. Department of Industrial Relations, (Dec. 21, 2010, No. B218275) ____ Cal.App.4th ____, the Second Appellate District Court of Appeals upheld determinations by the Department of Industrial Relations (“DIR”) and trial court that (1) a master planned community project is a “public work” subject to prevailing wage laws applicable to public improvement work performed by private contractors where such work was a condition of project approval, (2) Mello-Roos proceeds are “public funds,” and (3) once a project is deemed a “public work” under Prevailing Wage Law, the entire project is subject to the law – including those improvements which are privately financed. This case is significant because it turns the historical interpretation of “public work” under the Prevailing Wage Law on its head; typically the analysis to ascertain whether each public improvement is a public work is based on whether any portion of the required public improvement work received a direct allocation of public funds. If this decision stands, developers will be subject to prevailing wages on all projects which include public improvements financed only partially by public funds.

The project at issue in this case – the Rosedale Project in the City of Azusa (“City”) – included development of over 1,200 homes, upwards of 50,000 square feet of commercial space, and various public infrastructure. In a development agreement, the developer agreed to conditions of approval to construct certain public infrastructure and improvement work, including a public school and adjoining park, sewer and water facilities, and street work, among others, on behalf of the cities of Azusa and Glendora. The planning, design and construction of the facilities were to be funded through Mello-Roos bonds which were approved for indebtedness up to $120 million to be incurred by the Community Facilities District (“CFD”). Under agreements between the City and Azusa Land Partners (“ALP”), ALP was obligated to perform the public improvements required by the City as conditions of project approval, even if the cost of the improvements exceeded the amount of the authorized bond funds. Once construction was completed, the cost of the improvements totaled $147 million. The CFD only issued $71 million in bond funds to cover the cost of the public improvement work, leaving $76 million in public improvements to be borne by the developer.

ALP argued the project was not a public work under the Labor Code and accordingly, it should only be required to pay prevailing wages for the public improvements actually financed with bond proceeds – not for privately funded infrastructure improvements for which no bond proceeds were received. In expanding the term “public work” under the Prevailing Wage Law, the Court held the entire project constituted a “public work” because the project was funded in part through public funds. The Court reasoned that the phrase “work done for” in the exemption includes all the infrastructure work performed as required by the City as a condition of project approval – not just the work for which the developer received bond proceeds.

The Court also held that under the plain meaning of Section 1720, the Mello-Roos bond proceeds constituted public funds. The Court focused on the phrase “paid for in whole or in part out of public funds” and reasoned that the City and CFD are public entities which directed Wells Fargo, the holder of the loan proceeds, to pay the developer for public works constructed.

Finally, the Court concluded that the obligation to pay prevailing wages applies to all required public works improvements, including those paid with private funds. The Court reasoned that “once the determination is made that the project is a ‘public work’ under [the statute], the entire project is subject to the prevailing wage laws.” The Court reasoned that the law does not contain a requirement that funds be directly allocated to specific works of public improvements or require dollar-for-dollar reimbursement for infrastructure improvements. The Court found that “public work of improvement” means all public infrastructure and improvements required as conditions of approval. Assuming the Court’s holding stands, ALP will be required to pay prevailing wages on the $76 million in public improvements which it privately financed. Further, the Court’s decision could stifle development in an already dismal economic climate.

The California Supreme Court denied at least 36 requests to grant review of the case.

Katherine J. Hart is a senior associate at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.