In its December 2010 decision in Azusa Land Partners v. Department of Industrial Relations,1 the California Court of Appeal held that a private developer must pay prevailing wages for construction of all public improvements in connection with a development project if any part of such public improvements is publicly funded. This decision has significant implications for the cost of private development projects. This Client Alert updates information previously provided regarding prior proceedings in this case.

Background / Case Summary

Under California’s prevailing wage law2 (the Prevailing Wage Law), prevailing wages must be paid for "construction work" on "public works" projects of $1,000 or more. "Public works" are broadly defined. They include "[c]onstruction, alteration, demolition, installation, or repair work done under contract and paid for in whole or in part out of public funds, . . . [and] . . . work performed during the design and preconstruction phases of construction . . . ."3

In Azusa Land Partners, private developer Azusa Land Partners (ALP) received $71 million in proceeds from Mello-Roos4 bonds to partly pay for $145 million in public improvement projects required by the City of Azusa in connection with ALP’s master planned community. The California Department of Industrial Relations initially undertook to determine whether the entire master planned community was a "public work" under the Prevailing Wage Law. It concluded that the master planned community was a public work because it was done under contract and paid for in part out of public funds (i.e., the Mello-Roos bond proceeds).5 In Azusa Land Partners, the court agreed with this conclusion.

Under a specific exemption in the Prevailing Wage Law, however, a private development project is not entirely subject to prevailing wage requirements even if it is paid for in part out of public funds and qualifies as a "public work." Prevailing wage requirements apply only to public improvement work in connection with such a project, provided that (1) the public improvement work is required as a condition of regulatory approval, (2) the project is an otherwise private development, (3) the public entity providing funding does not contribute more money, or the equivalent of money, to the overall project than is required to construct the public improvement work and (4) the public entity does not maintain any proprietary interest in the overall project.6

In Azusa Land Partners, the court interpreted the aforementioned exemption in the Prevailing Wage Law to developers’ disadvantage. It held that construction of all public improvements required as a condition of regulatory approval for a private development project is subject to the Prevailing Wage Law, including public infrastructure constructed and financed with private money (i.e., from developer equity and/or construction loans). ALP makes the argument (among others) that the privately funded portions of the public improvement projects should not be subject to prevailing wage requirements.

Implications

Prior to the Azusa Land Partners decision, one could argue, and many projects were constructed and financed based on the premise that, private developers must pay prevailing wages for construction of only those portions of public improvements required as a condition of regulatory approval for which the developers received public funding. In its decision in Azusa Land Partners, the California Court of Appeal clearly debunked such an argument. Nevertheless, some questions remain.

  • How far-reaching will this decision be? Will it affect projects that are underway or were previously completed and financed partially with public funds? What, if any, will the penalties be for ongoing or already completed projects if enforcement actions are taken?
  • Will solely the payment of development impact or school fees from public funds cause a project to be deemed a public work?
  • How will the phrase "required as a condition of regulatory approval" in the Prevailing Wage Law exemption be interpreted? Will further interpretation limit the use of the exemption from prevailing wage requirements for projects that are otherwise deemed "public works"?
  • How will this change the use of common financing mechanisms such as Mello-Roos bonds? Will projects that form Mello-Roos districts and receive Mello-Roos funding after all public improvements are completed be subject to prevailing wage requirements?
  • Will this change affect feasibility of ongoing projects for which bonds have already been issued and result in potential bond defaults and/or construction delays? How will this affect analysis and disclosure of project costs and public/private partnerships?

While many questions remain unanswered, the court in Azusa Land Partners emphasized that the legislative policy in California is "to vigorously enforce minimum labor standards." With that in mind, the public finance bar, underwriters and developers will have to re-think their analysis and disclosure and possibly create different ways to further public/private partnerships and public financing arrangements going forward.

We believe that ALP intends to appeal the decision in Azusa Land Partners to the California Supreme Court. Generally, in that event, ALP must file a notice of appeal no later than 180 days after December 21, 2010 (the date of the Court of Appeal’s judgment), and possibly sooner, based on the 2011 California Rules of Court. In the meantime, however, private developers should proceed with caution on all projects that are receiving some form of public financing.