When Your “Private” Project Suddenly Turns into a “Public” Project. Hint: It Doesn’t Necessary Turn on Public Financing or Construction

by Wendel, Rosen, Black & Dean LLP
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Illustration of Dr. Jekyll and Mr. Hyde

In 1931, during the Great Depression, the federal government enacted the Davis-Bacon Act to help workers on federal construction projects. The Davis-Bacon Act, also known as the federal prevailing wage law, sets minimum wages that must be paid to workers on federal construction projects based on local “prevailing” wages. The law was designed to help curb the displacement of families by employers who were recruiting lower-wage workers from outside local areas. Many states, including California, adopted “Little Davis-Bacon” laws applying similar requirements on state and local construction projects.

California’s current prevailing wage law requires that contractors on state and local public works projects pay their employees the general prevailing rate of per diem wages based on the classification or type of work performed by the employee in the locality where the project is located, as well as to hire apprentices enrolled in state-approved apprentice programs and to make monetary contributions for apprenticeship training.

Sometimes, however, it can be difficult to determine whether a project is a public works project or a private works project, even when you intentionally try to structure it as a project in which prevailing wages are not required, as one developer found out in the case of Cinema West, LLC v. Baker, California Court of Appeals for the First District, Case No. A 144265 (June 30, 2017).

Cinema West, LLC v. Baker

The Disposition and Development Agreement

In 2004, the City of Hesperia (City) began acquiring vacant property in its downtown area for the development of a “Civic Plaza,” which was to include a city hall, public library, other governmental buildings and “complimentary retail, restaurant, and entertainment establishments.”

In 2010, the City entered into a disposition and development agreement (DDA) with Cinema West, LLC (Cinema West) to develop a “12-screeen digital cinema immediately west of the Civic Plaza Park.” Under the terms of the DDA:

  1. The City was to convey 54,000 square feet of real property to Cinema West for $102,529;
  2. Cinema West was to construct as 38,000 square foot, 12-screen digital theater on the site which was to be operated for a minimum of ten years; and
  3. The City was to construct a parking lot, water retention system and off-site improvements including curbs, gutters and sidewalks for the theater.

In addition, under the terms of the DDA and other related documents:

  1. The City was to provide an interest-bearing loan to Cinema West in the amount of $1,546,363 equal to the City’s estimated cost to build the parking lot, water retention system and off-site improvements ($1,443,834), in addition to the fair market value of the property conveyed to Cinema West ($102,529) which was forgivable over ten years. This amount was later increased by $250,000 on account of rising steel prices and the City’s adoption of new building codes; and
  2. The was to provide a one-time payment of $102,529 as consideration for the ten-year operating agreement.

The DDA stated that the City was not “providing any financial assistance to [Cinema West] in connection with [Cinema West’s] acquisition of the Site or development of the Project thereon” and that Cinema West “is paying fair market value to acquire the Site and is responsible for paying the full costs of all improvements to be constructed on the Site”

The Department of Industrial Relations Decision and Superior Court Writ Proceeding

In November 2012, as construction of the theater and parking lot were nearing completion, the International Brotherhood of Electrical Workers Local 477 (Union) submitted a request to the Director of the California Department of Industrial Relation (DIR) for public works coverage determination for the project.

In response,Cinema West submitted a letter arguing that the theater was a private project not subject to California’s prevailing wage statutes because: (1) Cinema West purchased the property for fair market value; (2) no public financial assistance was involved; (3) there was “no evidence to suggest that the parking lot was built because it was needed to serve the Project”; (4) their was no “no public funding” associated with the  ten-year “forgivable loan”; and (5) the one-time operating agreement payment was never consummated.

The DIR disagreed. First, although under the DDA Cinema West was to construct the theater and the City was to construct the parking lot, water retention system and off-site improvements, the DIR construed  construction of the theater and construction of the parking lot and related improvements as a “single complete and integrated theatre complex” and thus a “public work” subject to prevailing wages. Second, the DIR construed the City’s ten-year “forgivable loan,” one-time operating agreement payment, and construction of the parking lot and related improvements as “public subsidies” also making the project a “public work” subject to prevailing wages.

In April 2013, Cinema West filed an administrative appeal which was denied by the DIR in June 2013. Thereafter, Cinema West filed a petition for writ of mandate under Code of Civil Procedure section 1085 with the Sonoma County Superior Court to challenge the DIR’s decision. As part of its writ, Cinema West submitted evidence that was not part of the administrative record, including statements in its verified petition and three declarations. At the hearing on Cinema West’s writ, the trial court sustained the DIR’s objections to Cinema West’s extra-record evidence and denied Cinema West’s writ concluding that the evidence “in” the record was undisputed and that based on that evidence alone the project was a public works.

Cinema West appealed.

The Court of Appeals Decision

On appeal, the Court of Appeals noted that “[t]he conditions of employment on construction projects financed in whole or in part by public funds are governed by the prevailing wage law,” that “[t]he overall purpose of the prevailing wage law is to protect and benefit employee on public works projects,” and that the public works statutes are “liberally construed to further its purpose.”

The Court of Appeals further noted that Labor Code section 1720 “broadly” defines “public works” to mean “construction, alteration, demolition, installation, or repair work done under contract and paid for in whole or in part out of public funds” including “work performed during the design and preconstruction phases of construction, including, but not limited to, inspection and land surveying work, and work performed during the post construction phases of construction, including, but not limited to, all cleanup work at the job site.”

Further, explained the Court of Appeals, the term “paid for in whole or in part out of public funds” has been broadly interpreted:

It encompasses both direct and indirect subsidies, including “[t]he payment of money or the equivalent of money by the state or political subdivision directly to or on behalf of the public works contractor, subcontractor, or developer”; “[p]erformance of construction work by the state or political subdivision in execution of the project”; “[t]ransfer by the state or political subdivision of an asset of value for less than fair market price”; “[f]ees, costs, rents, insurance or bond premiums, loans, interest rates, or other obligations that would normally be required in the execution of the contract, that are paid, reduced, charged at less than fair market value, waived, or forgiven by the state or political subdivision”; “money loaned by the state or political subdivision that is to be repaid on a contingent basis”; and “[c]redits that are applied by the state or political subdivision against repayment obligations to the state or political subdivision.” (§ 1720, subd. (b)(1)-(6).) The statute excepts from this otherwise broad definition of public funding “a public subsidy to a private development project that is de minimis in the context of the project.”

Cinema West’s Extra-Record Evidence

Addressing Cinema West’s extra-record evidence first, the Court of Appeals noted that “[i]t is well established that the use of extra-record evidence is limited and generally improper since review is normally confined to the record.” And, here, held the Court:

Cinema West implies that there is an exception to the extra-record evidence rule when the court deems the administrative record inadequate or the agency’s efforts to develop a record wanting, but it cites no authority for this proposition. Nor does it explain what criteria the court should consider in determining the adequacy of such record or efforts. Regardless, Cinema West has failed to demonstrate any inadequacy in the PWL coverage proceedings before the Director or in the record there developed. The coverage determination was initiated by the Union, which submitted documentation pertaining to the Hesperia theater and parking lot development. The documents the Union submitted consisted entirely of public records pertaining to the development. While characterizing the Union’s evidence as “one-sided,” Cinema West does not contend that any of the documents submitted by the Union are not genuine, and the City submitted copies of many of the same documents in response to the Director’s request. It does not suggest any pertinent documents are missing from the record. And contrary to Cinema West’s suggestion that the Union’s proffered evidence was all that was submitted, the record reflects that both the City and Cinema West were provided notice of the proceedings and given the opportunity to submit any documents in their possession bearing on the issues. The Director twice requested documents from the City, indicating her intent to have a complete record.

It was in this context that the trial court found Cinema West had the opportunity, but chose not to, submit any evidence in the initial proceeding or the appeal. Cinema West makes much of the fact that it sought and was denied a hearing on its administrative appeal but, as the trial court observed, a hearing was “not a prerequisite for an interested party to submit evidence.” The trial court’s implied finding that the Director did not preclude Cinema West from submitting evidence and the court’s express finding that Cinema West’s failure to do so was its own choice are supported by substantial evidence.

A Public Works Project Under the Labor Code

Next, addressing Cinema West’s arguments that the project was not a public work subject to the prevailing wage laws, the Court held that the project was a public works for two reasons.

First, the theater and the parking lot and related improvements, while constructed separately by Cinema West and the City, should be considered a single project for the following reasons:

  1. The DDA indicated that the parking lot was directly related to the theater and specifies that “[t]he Parking Lot Improvements will be designed and constructed by [City] as necessary to serve the proposed 12-screen theater with 1,800 seats and any other uses contemplated by [City] . . .”;
  2. Cinema West and the City used the same engineering firm to prepare the plans for the design of both the theater and parking lot;
  3. The DDA provided that following the City’s construction of the parking lot Cinema West was obligated to “maintain the Parking Lot Improvement pursuant to the CC&Rs and the reciprocal access and parking agreement, including the cost of utilities (water and electricity)”; and
  4. The theater and parking lot were built together on the same vacant parcel of land.

Second, responding to Cinema West’s argument that “not a penny of public funds was received by Cinema West in connection with the construction of the Theater,” because it was unable to perform some of the requirements of the operating agreement and therefore did not receive or accept the ten-year “forgivable loan” or the one-time operating agreement payment, the Court of Appeals held:

Even if . . . Cinema West never receives any of the promised payments, the DDA and related agreements call for the loans and one-time payment to be made and the one-time payment is not conditional. We agree with the trial court that allowing a developer to accept public benefits and, if a later determination is made that the project is a public work, disclaim public benefits to avoid paying prevailing wages would seriously undermine the [public works law (PWL)]. It would incentivize gamesmanship on the part of local government bodies and developers whereby projects would be publicly subsidized but constructed without PWL compliance. If an investigation later revealed the violation, the developer could still avoid paying prevailing wages and statutory penalties by repaying or disclaiming the public subsidy. And if the developer chose instead to retain the subsidy because its value exceeded the cost of post hoc PWL compliance and penalties, employees would be worse off because the passage of time and transitory nature of construction work increase the likelihood that some employees could not be found. Such a rule would discourage voluntary compliance and place undue burdens on the Department’s limited enforcement personnel. This cannot have been the Legislature’s intent.

Conclusion

Cinema West is a cautionary reminder for developers and contractors that even if a government entity does not directly construct or finance a project, but merely constructs necessary yet appurtenant parts of a larger project and does not directly finance a project but instead provides conditional loans that may never be received, a project may nevertheless be found to a be a public works project subject to prevailing wages. Cinema West also provides an important procedural reminder, that when submitting evidence in an administrative proceeding, provide all evidence on which you intend to rely on or you may be stuck with the “record” in any subsequent writ or appeal.

Photo credit: Dr Jekyll and Mr Hyde poster edit1 by Chicago : National Prtg. & Engr. Co. / Wikimedia Commons [CC BY-SA 3.0]

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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