By William W. Abbott
As former redevelopment agency properties come back into the marketplace, prospective developers must proceed cautiously to avoid tripping on the State’s prevailing wage law. What appears to be a fair market transaction may include a disguised agency contribution or publically funded construction, thus triggering prevailing wage for the entire development project. Frequently, this obligation does not surface until after the project is under construction.
The City of Hesperia became the successor agency to its redevelopment agency following dissolution by the state legislature. For a number of years, the City sought the development of the first theater complex inside the City limits. Eventually, as the successor agency, the City negotiated a fair market priced sale to Cinema West, LLC, (“Cinema”) to develop a 12-screen complex. As part of the negotiations, the City would construct the parking lot, provide reciprocal easements, develop a water retention system for the theater and parking lot, and construct offsite improvements. The theater operator would sign a 10-year operating covenant for the theater. The documents recited that the developer was providing all the financing for the theater and permits, and that the City was purchasing the operating covenant in the form of a forgivable loan in the amount of $1,546,363. The City also agreed, as part of the consideration for the operating covenant, to the payment of $102,259., to Cinema a sum equal to the purchase price paid by the theater developer for the land. As the project moved forward, construction costs proved to be greater than originally budgeted. The City provided an additional $250,000 in the form of a forgivable loan in exchange for a second operating covenant.
Nearing the end of theater construction, Union Local 477 sought a public works coverage determination by the Director of the Department of Industrial Relations. Following submittal of documents by the City and written arguments by Cinema, the Director concluded that the theater was a public work subject to prevailing wage requirements. This conclusion was reached based upon the City payment of $102,259, the two forgivable loans, and the construction of the parking lot and offsite improvements. Cinema filed a timely appeal. The Director considered the additional evidence and argument, but affirmed its initial decision. The Department then initiated a wage enforcement proceeding. Cinema then filed a writ in superior court and sought injunctive relief against the enforcement proceeding. The superior court ruled in favor of the Department.
On appeal, the Appellate Court also affirmed. Procedurally, Cinema argued that it was entitled to present extra record evidence before the Superior Court. Both the trial court and appellate court rejected this argument, citing the established cases that extra record evidence (that is evidence not presented to the administrative tribunal) can only come in at trial in limited circumstances.
Turning to the merits, Cinema made four arguments (1) private construction is not subject to prevailing wage merely because other related construction is publically funded; (2) mere coordination of two related construction projects does not create a complete integrated “object”; (3) Cinema did not receive public funds or their equivalent; and (4) the construction of the parking lot did not transform the private theater into a public work. Looking at the totality of circumstances, the appellate court concluded that the evidence supported the conclusion that the parking lot construction and theater were interlinked. This evidence included communications by the Cinema to the City describing the City’s contribution along with the approving resolutions referencing the City’s contributions. Other factors weighed in support of finding the requisite relationship between theater and parking lot, including timing of construction, the use of the same contractor and the fact that the theater did not meet the City’s parking requirements without use of the parking lot. The appellate court also considered that the evidence regarding the forgivable loans as reflecting a public subsidy, but eventually concluded that it need not reach that issue.
Given the expansive statutory definition of public works for prevailing wage purposes, developers need to look closely at any transaction which goes beyond a fair market sale.
William W. Abbott is a shareholder at Abbott & Kindermann, Inc. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.
The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or 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.