HARRISBURG (LN) — The Pennsylvania Supreme Court reversed the Commonwealth Court, ruling that a build-to-suit lease for a new State Police headquarters in northeast Pennsylvania constitutes "public work" under the state’s Prevailing Wage Act, requiring developers to pay prevailing wages to construction workers.
The court held that the explicit text of the Act requires a consideration of all relevant circumstances to determine whether a pre-development lease is a bona fide lease, rejecting the Commonwealth Court’s conclusion that risk allocation was the sole dispositive factor.
The dispute centered on a lease between the Commonwealth, through the Pennsylvania State Police, and PSP NE, LLC, a private developer. The lease required the developer to construct a headquarters, barracks, and training facility on land owned by the developer.
The total development cost for the project was in the millions of dollars. The developer borrowed a significant portion of the funds from First National Community Bank to fund the purchase of the premises and construction. The loan agreement required the state police’s annual rent to be sufficient to cover the developer’s debt service.
The initial lease term was 20 years, with two five-year optional extensions. The state police could not cancel the contract before 10 years in the absence of exceptional circumstances. After 10 years, the state police could cancel the contract at its discretion but had to pay a penalty of three months’ rent and reimburse the developer for its "unamortized costs of renovations."
The Department of Labor and Industry’s Bureau of Labor Law Compliance ruled in February 2020 that the project was governed by the Prevailing Wage Act. The bureau stated that while the developer provided initial funds, lease payments from the state police would reimburse that outlay, making them the ultimate funding source.
The Prevailing Wage Appeals Board rejected the developer’s grievance, finding that the developer did not solely bear the financial risk because the lease provided for repayment of amortized construction costs through rental payments or reimbursement upon termination.
The Commonwealth Court reversed the board’s decision, classifying the lease as a bona fide lease. The court concluded that the state agreed to pay rent for the use and occupancy of the premises, not for construction, and that the developer was solely responsible for repaying the construction loan.
The Pennsylvania Supreme Court granted the bureau’s petition for allowance of appeal to clarify how its prior precedent in 500 James Hance Court v. Pa. Prevailing Wage Appeals Bd. applies to pre-construction leases.
The court noted that its prior precedent refused to adopt the Phoenix Field Office test, which looks at factors such as lease length and government involvement, and instead required that "risk allocation should be a prominent consideration."
Today, the court recognized that the explicit text of the Act requires a consideration of all relevant circumstances. The court stated that the circumstances clearly indicate that public funds paid for, at least in part, construction.
The court applied a totality of the circumstances analysis, considering factors from the Phoenix Field Office test alongside the Hance risk allocation factors.
The court noted the lease was for a custom-built facility with a term of at least 20 years, significantly longer than the lease in Hance. The state police dictated specific needs in a 128-page document, and the facility was designed exclusively for their use.
The court found that the loan agreement required rent payments from the state police to cover the developer’s debt service, meaning public funds were a pre-condition to the financing of construction costs.
The court also rejected the developer’s argument that it bore all the risk. The state police were liable for unamortized costs if the lease was terminated before the end of the initial term. The court stated that this contractual requirement represented a definite risk that the state police, a public entity, may be liable for construction costs.
"Risk allocation is but one of many factors to be considered to determine whether public funds paid for construction under Hance," the court wrote. "Since the totality of the circumstances here establish that public funds paid for construction costs of the State Police headquarters, the Lease is subject to PWA requirements."
The court reversed the Commonwealth Court’s order.
Justices Donohue, Dougherty and Wecht joined the opinion. Justice Mundy filed a concurring opinion in which Chief Justice Todd and Justice Brobson joined.