PSP NE, LLC v. PWAB; Appeal of: BLLC

[J-18-2025] [MO:McCaffery, J.]

IN THE SUPREME COURT OF PENNSYLVANIA

MIDDLE DISTRICT

PSP NE, LLC : No. 38 MAP 2024

:

: Appeal from the Order of the

v. : Commonwealth Court dated March

: 30, 2023 at No. 576 CD 2022

: Reversing the Order of the

PENNSYLVANIA PREVAILING WAGE : Pennsylvania Prevailing Wage

APPEALS BOARD : Appeals Board dated May 17, 2022

: at No. PWAB-1G-2020.

:

APPEAL OF: BUREAU OF LABOR LAW : ARGUED: April 8, 2025

COMPLIANCE :

CONCURRING OPINION

JUSTICE MUNDY DECIDED: May 19, 2026

I join the result reached by the majority, but I have reservations about some of its

rationale, primarily involving its criticism of 500 James Hance Court v. Pennsylvania

Prevailing Wage Appeals Board, 33 A.3d 555 (Pa. 2011) (“Hance”). While the majority

announces that “[t]oday, we recognize that the explicit text of the PWA requires a

consideration of all relevant circumstances to determine whether a pre-development

lease is a bona fide lease,” Majority Op. at 2, nothing in Hance suggested otherwise, and

indeed, such assertion is arguably tautological as it states that when a factor is relevant

in the determination, a reviewing court should consider it – a proposition that is true in

applying any statute. A fair reading of Hance reflects it sought ways to discover whether

a document purporting to be a predevelopment lease was in fact a disguised construction

contract – an issue the Court considered the primary one raised in that appeal. See

Hance, 33 A.3d at 569. As for its alleged “fail[ure] to define what a facially legitimate

lease is,” the term “lease” is not used in the relevant statute, and its well-understood

meaning is not presently in dispute (nor was it in Hance), while the concept of facial

legitimacy plainly refers only to the face of the document. 1

Below, I provide a brief introductory note about predevelopment leases, a review

of the Hance decision, and an explanation of how I would apply it in the context of the

instant dispute.

A. Predevelopment leasing: benefits and issues

Predevelopment leasing – the leasing of a property before it is constructed and

ready for occupancy – is a business practice with benefits to both sides of the transaction.

Tenants can reserve space before it is available to the public, sometimes at a discount,

and they can often obtain customization for their space. 2 Developers can gauge demand

and ensure future occupancy before project construction or completion. This tends to

mitigate the financial risks associated with new construction and reduce the likelihood of

the property sitting vacant, which in turn helps secure financing as lenders are more likely

to provide a loan if they see demand for the property. Developers can also assess market

demand and adjust their plans accordingly.

Because money is fungible, rental payments made by tenants can, in some sense,

be viewed as retroactively funding the construction project, at least to the extent they

exceed the landlord’s ongoing costs (hereinafter, “carrying costs”). See Basehore v.

1 See, e.g., Commonwealth v. Edmunds, 586 A.2d 887, 891 (referring to the possibility of

salvaging a search warrant from “facial invalidity” by considering testimony “outside the

four corners of” the probable-cause affidavit). See generally BLACK’S LAW DICTIONARY 590

(6th ed. 1990) (defining the face of an instrument as that which is shown by the language

employed without resort to extrinsic facts or evidence); WEBSTER’S NEW WORLD COLLEGE

DICTIONARY 507 (4th ed. 1999) (“what is shown by the language of a document, without

explanation or addition”).

2 Nevertheless, the rental payments do not begin until the tenant takes occupancy.

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Hampden Indus. Dev. Auth., 248 A.2d 212, 223 (Pa. 1968) (explaining that certain

companies “paid for the projects” in question “through their rent payments”). 3 The

presence of a predevelopment lease can lend itself to viewing the future rental payments

in this way because the building owner depends on those payments when it secures

construction financing and builds the project. Where public funds are used for such

payments, this raises questions about whether the contract is a bona fide lease or a

disguised construction contract, which makes a difference for prevailing-wage purposes.

One factor that tends to signal the developer is a traditional landlord, is if the developer

maintains a reversionary interest in the property at the end of the lease, and the building’s

useful life is known or judged to be substantially greater than the lease term. See, e.g.,

Hance, 33 A.3d at 575. Another factor is the allocation of the traditional risks of property

ownership, as discussed below.

As with the present case, Hance involved a predevelopment lease. The Court

identified three issues for resolution: under what circumstances does a predevelopment

lease trigger regulation under the Pennsylvania Prevailing Wage Act (the “PWA”), to what

degree may parties who have entered into a lease involving public funds alter their

business arrangement to eliminate the public-funding aspect for one well-defined facet of

the project, and in this regard may they phase construction into a privately-funded shell

stage and a publicly-funded fit-out stage? See Hance, 33 A.3d at 569-70.

B. Using construction phasing to eliminate public funding for part of the project

Hance considered the second and third questions to be “interrelated,” id. at 570,

and it addressed them first. It observed there was no applicable estoppel or other theory

freezing the initial lease arrangement in place, and hence, the parties remained free to

3 Appellee lists many of its ongoing post-occupancy carrying costs at pages 5-6 of its

brief.

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substitute it with a new predevelopment lease at their will. The Court also acknowledged

that staging the construction into two phases consisting of a generic shell, and an initial

customized fit-out tailored to the first tenant, was a rational commercial practice. See id.

at 570-71. Referencing Penn National Mutual Casualty Insurance Co. v. PWAB, 715 A.2d

1068, 1074 (Pa. 1998) (“Penn National I”) (holding that nothing in Section 5 of the PWA

mandates that an entire construction project be covered by the PWA), the Hance Court

cautioned that courts should not approve of artificial construction phasing having no

independent business justification, but that Penn National I’s rationale, by its terms,

“extends to major, commonly-appreciated construction milestones, such as the

completion of site preparation or of a commercial building’s shell.” Hance, 33 A.3d at

572.

In terms of the ability to avoid prevailing wages in this respect, Hance analogized

to the concept of “tax avoidance,” where a taxpayer arranges transactions in compliance

with existing laws as a means of paying lower taxes – as contrasted with “tax evasion,”

which is fraudulent and would arise from “an elaborate and devious form of conveyance

masquerading as a corporate reorganization, and nothing else.” Id. at 570 n.22 (quoting

Gregory v. Helvering, 293 U.S. 465, 470 (1935)). In this regard, and respectfully, I depart

from the majority to the extent it may be construed to suggest Developer’s “desire[] to

avoid the application of the PWA” counts as “circumstantial evidence establishing that the

State Police’s rent payments fund the costs of construction.” Majority Op. at 29. As

noted, avoidance of regulatory requirements through compliance with applicable laws is

proper regardless of motivation, while evasion through artifice is not.

Although the dissent in Hance found such analogy inapt because tax laws are to

be strictly construed while the PWA is to be liberally construed, the Hance majority noted

in response that Helvering had nothing to do with strict construction. While it was

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nominally a tax case, its purport was that legislative drafting defines the scope of the

relevant enactment’s commands with respect to the structuring of transactions. Here the

PWA does not compel all developers to use public money, a limitation that exists

regardless of the PWA’s remedial purpose. The Hance majority also stressed that the

transaction under review had always involved a predevelopment lease, which tended to

undermine the suggestion that the new leasing arrangement was a subterfuge. See id.

Presently, the majority quotes from the Hance dissent, but it omits and does not otherwise

account for the Hance majority’s rejoinder. See Majority Op. at 22-23.

The Hance Court concluded its discussion of the second and third issues by

expressing that Penn National I’s analysis does not answer all questions arising in a

predevelopment lease context. It indicated the Court’s main focus going forward would

be in identifying the litmus that courts should use to detect “artful drafting of contracts to

evade wage regulations,” observing that a multi-factored standard utilized by the United

States Labor Department’s Administrative Review Board in In re Phoenix Field Office,

Bureau of Land Management, ARB Case No. 01–010, reprinted in 2001 WL 944696 (June

29, 2001) (the “Phoenix Field Office test”), was one possibility. Hance, 55 A.3d at 572.

C. Predevelopment leases, ownership, and risk allocation

The Hance Court then turned to the primary question presented: how to determine

whether a predevelopment lease constitutes disguised construction financing with

taxpayer dollars, thereby implicating wage regulation – the issue that most closely relates

to the element in the definition of “public work” involving payment with public funds. See

id. (citing 43 P.S. § 165-2 (defining a public work, in relevant part, as one that is “done

under contract and paid for in whole or in part out of the funds of a public body”)). In other

words, does the stream of rent payments under the lease, in reality, amount to

construction financing? Hance explained that labels used in transaction documents do

[J-18-2025] [MO: McCaffery, J.] - 5

not control the inquiry if the economic reality is different, as such would open the door to

artifice. In scrutinizing the transaction, the Court observed, the Phoenix Field Office

factors are valid, see id. (acknowledging that the test supplies “one method for

considering the economic reality” of a predevelopment lease), but they are framed in a

highly generalized way. They are stated to be lease length, government involvement,

private versus public use, recapture of construction costs, and evasive drafting – with this

last element being the only one that would “bear substantial independent significance if

proven.” Id.

In other words, evasive drafting is the key. But it will rarely be conceded by the

parties, so the question for the agency and for reviewing courts is how to discover it.

Hance refrained from explicitly adopting the Phoenix Field Office factors at that juncture

– without suggesting those factors should never be used in a future case – given they did

not account for a key facet of business transactions bearing on economic reality: the

allocation of the risks associated with ownership, including the risk that future rental

payments might cease.

Drawing on a United States Supreme Court decision that happened to arise in the

tax context (although that context was irrelevant), Hance explained that if the developer

bears the business risk “should anything go awry in the later years of the lease,” id. at

573 (quoting Frank Lyon Co. v. United States, 435 U.S. 561, 576-77 (1978)), the

developer is likely the true owner of the property – and thus a bona fide landlord. This is

because a rational business will not bear financial risk for nothing, but for the expected

commercial benefits of property ownership. To the extent the majority suggests this

improperly shifted the focus from the statutory “paid for” litmus to “new concerns” involving

ownership, Majority Op. at 22, I respectfully disagree. Hance simply highlighted one way

to discern that monetary remittances from a public body which, under the governing

[J-18-2025] [MO: McCaffery, J.] - 6

contract, appear to constitute rent payments, are in fact being used to pay for

construction. In this way, its focus on ownership was tied directly to the statutory “paid

for” prerequisite. Indeed, the whole point of both Hance and the present exercise is that

contracts that, facially, are predevelopment leases tagging payments to occupancy, may

conceal the economic reality that public monies are in fact being used to pay for

construction services – and one way to drill down into that reality is to look at who will end

up owning the building once it is constructed. Accord Majority Op. at 26 (framing the

question before this Court as “whether the rent payments are exchanged, at least in part,

for the service of constructing the facility”).

Risk is important to that determination. If a building’s only ability to generate

income is through rent, the expected rental payments in excess of carrying costs can, in

one sense, be viewed as retroactively paying for construction in every instance. See

Hance, 33 A.3d at 574 (acknowledging that “few office buildings would be built if the

construction costs, including the cost of servicing the construction loan, could not

ultimately be recouped by anticipated lease payments within a reasonable time frame”).

But it would be tenuous to suggest on those grounds that public money “paid for” the

construction of a project every time a completed building is subsequently rented to a

public entity under a predevelopment lease. In some circumstances, a public entity might

just want to reserve space in an office building before it is built without paying for its

construction. A predevelopment lease that leaves the risk of ownership with the

developer does not substantially alter that perspective, and hence, in that setting rental

payments do not embody retroactive construction financing any more than rental

payments made pursuant to a traditional post-development lease. But the same is not

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true of a predevelopment lease pursuant to which the ownership risks are borne by the

tenant. 4

Given these realities, Hance observed first that while the PWA is remedial, it does

not by its terms encompass privately-financed construction. See Hance, 33 A.3d at 573

& n.24 (acknowledging the General Assembly is free to change the PWA’s scope). That

being the case, where the developer shows it bears the risks normally associated with

long-term property ownership and the lease in question facially only requires rental

payments from the public body, the developer has established a prima facie case that

wage regulation is not implicated. The burden then shifts to the Bureau to present

evidence that the underlying reality of the transaction is different than it appears on the

surface. See id. at 573-74. Although the majority describes this burden shifting scheme

as “novel,” Majority Op. at 22, it is well known in many areas of the law, 5 and is a matter

of “elemental logic and fairness.” Hance, 33 A.3d at 576; see also id. at 573 n.25 (citing

31A CJS Evidence § 199 (2011)). It is the way issues are often decided in court, as we

explained more than 90 years ago:

4 The Bureau agrees risk allocation is “a prominent consideration in determining whether

any public funds are paying for construction costs.” Brief for Appellant at 16. It explains:

Risk allocation offers a way to both understand whether a private developer

is avoiding costs, or potential costs, but shifting its risk to a public body, and

to look into the future to determine whether public funds are likely to be

eventually expended to cover construction costs over time.

Id. at 31.

5 See, e.g., McDonnell Douglas Corp. v. Green, 411 U.S. 792, 802 (1973) (employment

discrimination); Batson v. Kentucky, 476 U.S. 79, 97 (1986) (race-based peremptory

challenges); Nardone v. United States, 308 U.S. 338, 341 (1939) (suppression of

incriminating evidence); In re Fortieth Statewide Investigating Grand Jury, 220 A.3d 558,

568 (Pa. 2019) (disclosure of records claimed to be protected by a privilege); Gussom v.

Teagle, 247 A.3d 1046 (Pa. 2021) (service of process); Borough of Perkasie v. Moulton

Builders, Inc., 850 A.2d 778 (Pa. Cmwlth. 2004) (conditional use applications in zoning

matters).

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In every lawsuit, somebody must go on with it; the plaintiff is the first to

begin, and if he does nothing he fails. If he makes a prima facie case, and

nothing is done by the other side to answer it, the defendant fails. The test,

therefore, as to the burden of proof is simply to consider which party would

be successful if no evidence at all was given, or if no more evidence was

given than is given at this particular point of the case; because it is obvious

that during the controversy in the litigation there are points at which the onus

of proof shifts, and at which the tribunal must say, if the case stopped there,

that it must be decided a particular way . . .. Now that being so, the question

as to onus of proof is only a rule for deciding on whom the obligation rests

of going further, if he wishes to win.

Henes v. McGovern, 176 A. 503, 506 (Pa. 1935), quoted in Hance, 33 A.3d at 575-76.

Once the developer establishes a prima facie case, Hance acknowledged that

evidence of evasive lease drafting can still exist if the Bureau demonstrates, for example,

that the rental payments allow recoupment of construction costs in an unusually short

time period for the industry, 6 or the public-body tenant holds an option to purchase the

building at the end of the lease term for a below-market price. On the other hand,

reversion of the premises to the developer at the end of the lease, and the note being

secured by a mortgage rather than the stream of rental payments, tend to show the

transaction is a bona fide lease. See Hance, 33 A.3d at 574-75.

D. Applying the PWA and Hance to this case

The lease presently under review is readily distinguishable from the one in Hance

because it does not involve a bifurcated project with a generic shell and customized fit-

out, but a build-to-suit transaction for the entire project. Cf. id. at 575 (indicating the

Bureau did not account for aspects of the lease that seemed inconsistent with its being a

disguised build-to-suit contract). The parties negotiated and executed an agreement

6 The time period matters because of the time value of money. The nominal value of all

rent payments when added up might equal or exceed the construction costs, but the

discounted present value of the future stream of rental payments could, at the time of

construction, be far lower depending on the timeframe involved.

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covering both construction costs and tenancy. Accord Brief for Appellant at 26-27

(distinguishing Hance on that basis and observing that, here, there is “one work” and one

build-to-suit agreement governing that work and requiring the payment of public monies).

Although the payments commence once the project is developed and the Pennsylvania

State Police begins occupancy, and although Appellee holds a reversionary interest,

construction costs for customization are purposefully built into the amount of the rent, and

the agreement reflects that rent is contingent upon the developer’s construction to the

State Police’s specifications. The agreement also gives a great deal of control to the

tenant in matters of construction, see, e.g., Brief for Appellant at 9-10 (explaining the

predevelopment lease includes 128 pages of specifications the developer must follow,

encompassing such detailed items as an evidence room, firing range, arms storage

facility, vehicle-related storage areas, and the installation of a 30-inch plaque with the

State Seal – and alleging these specifications make it a “build-to-suit lease agreement”),

all of which suggests the Hance burden-shifting framework has not been invoked in the

first instance because the developer has not established an initial prima facie case that

wage regulation is not implicated.

Finally, the State Police have assumed at least some of the risk by agreeing to pay

the developer’s unamortized construction costs of more than $1.5 million upon early

termination of the lease after 10 years. This type of partial risk shifting was absent from

the agreement for the shell in Hance.

E. Conclusion

All of this tends to indicate the State Police’s relationship with the developer, while

in part landlord-tenant, is also that of a customer hiring a developer to meet its specific

construction needs. In my view, that is enough to decide this appeal.

Accordingly, I respectfully concur in the result.

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Chief Justice Todd and Justice Brobson join this concurring opinion.

[J-18-2025] [MO: McCaffery, J.] - 11