In Hensel Phelps Construction Company v. San Diego Port District, (— Cal.Rptr.3d —-, Cal.App. 4 Dist., July 26, 2011), a court of appeal considered whether a hotel construction project that is being built on land leased by a public agency is a public work within the meaning of the prevailing wage law (“PWL”) where the lease provides that the public agency will provide a rent credit for the first 11 years of the lease. The court of appeal held the hotel construction project is a public work and is subject to the prevailing wage law.
For several years, the San Diego Unified Port District (“District”) sought to develop a hotel on a waterfront parcel known as the Campbell Shipyard site (the “Property”), but negotiations were unsuccessful. The District again issued a request for proposal in 2002 for a hotel to be built on the Property. Rent was to be based on a percentage of the gross income of hotel operations.
The District received four proposals but chose the proposal submitted by the Hilton San Diego Convention Center, LLC (“HSDCC”), which estimated the project’s costs as $292.5 million. HSDCC informed District that it would “need to consider economically supporting the project.” The District and HSDCC entered into an option agreement and negotiated a proposed lease, pursuant to which HSDCC would receive a rent credit equal to 60 percent of the rent due each month for 11 years, not to exceed a total of $46.5 million. During the option period, HSDCC advised the District that, because construction costs had increased, HSDCC would need additional financial support from the District or other public entities. In response, the District approved an amendment to the proposed lease terms to provide for a 100 percent rent credit for the first two years, instead of a 60 percent credit, which was expected to result in an approximate $3 million savings to HSDCC. Thereafter, HSDCC assigned its option to One Park Boulevard, LLC (“OPB”), which in turn entered into a lease agreement with the District.
The lease entered into between OPB and the District provides for a 100 percent rent credit until the 34th month of the lease and a 60 percent rent credit thereafter. OPB contracted with Phelps Portman San Diego, LLC, (“Developer”) to serve as the hotel project’s developer, who in turn chose Hensel Phelps Construction Co. (“Hensel Phelps”) to be the construction manager.
The Department of Industrial Relations (“DIR”) determined that the hotel project was a public work subject to the PWL. The Developer and Hensel Phelps filed a petition for writ of mandate against the District, the DIR and its director. The trial court granted the request of Carpenters/Contractors Cooperation Committee, Inc. (“CCCC”) to intervene in the action. The trial court granted the petition of the Developer and Hensel Phelps and directed the DIR and its director to issue a ruling that the hotel project is not a public work and is not subject to the PWL. The CCCC appealed the trial court’s ruling.
The court of appeal reversed the judgment of the trial court and found that the hotel project is a public work that is subject to the PWL. Pursuant to the PWL, at Labor Code section 1720, subdivision (a)(1), “public works” is defined as “[c]onstruction, alteration, demolition, installation, or repair work done under contract and paid for in whole or in part out of public funds . . .” Before 2002, the phrase “paid for in whole or in part out of public funds” was not defined by the PWL, resulting in a court decision that held waived rents did not constitute a project being paid for out of public funds. In response, the Legislature added subdivision (b) to section 1720, to define the phrase “paid for in whole or in part out of public funds” to include: “Fees, 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.” The legislative history of the amendment shows that it was intended “to remove ambiguity regarding the definition of public subsidy of development projects.”
The court of appeal held that the hotel project falls within the definition of a public work in section 1720. The court found the project consists of “[c]onstruction . . . done under contract” because the terms of the lease required the construction of a hotel on the Property according to the specifications of the District. The Developer and Hensel Phelps argued that none of the rent credits have been shown to have paid for the actual construction costs of the hotel. The court rejected this argument because the rent credit agreed to by the parties and “provided in the Lease was intended to subsidize the construction of the Project.” The court also rejected the argument “that a project does not constitute ‘construction . . . done under contract’ unless the public agency pays the actual costs of construction rather than providing a different type of subsidy to the project.” The addition of subsection (b) to section 1720 indicates “the opposite is the case.”
The court of appeal further found the hotel project “is a public work in that construction was ‘paid for in whole or part out of public funds.’” The court found that under the plain terms of the lease, the District agreed to a reduction in rent. A reduction in rent is clearly included in section 1720, subdivision (b), as falling within the definition of “paid for in whole or in part out of public funds.” The court stated, “Under a plain commonsense meaning, rent is reduced when the amount of the rental obligation is set at a certain amount by agreement or by operation of law, and a discount is given from that amount.” Also, “[u]nder a plain commonsense meaning, rents are waived or forgiven when a party agrees not to impose or demand rents.” Applying these definitions, the court concluded that the District also waived and forgave some of the rent within the plain meaning of section 1720.
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