The opinion
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
PSP NE, LLC, :
Petitioner :
:
v. : No. 576 C.D. 2022
: Submitted: February 7, 2023
Pennsylvania Prevailing Wage :
Appeals Board, :
Respondent :
BEFORE: HONORABLE PATRICIA A. McCULLOUGH, Judge
HONORABLE CHRISTINE FIZZANO CANNON, Judge
HONORABLE MARY HANNAH LEAVITT, Senior Judge
OPINION
BY SENIOR JUDGE LEAVITT FILED: March 30, 2023
PSP NE, LLC (Developer) petitions for review of an adjudication of
the Pennsylvania Prevailing Wage Appeals Board (Board) holding that Developer’s
construction of a facility to be leased to the Pennsylvania State Police (State Police)
was a public work subject to the requirements of the Pennsylvania Prevailing Wage
Act (Act).1 In doing so, the Board affirmed a determination of the Department of
Labor and Industry’s Bureau of Labor Law Compliance (Bureau of Compliance).
On appeal, Developer contends that the Board erred in holding that its
predevelopment lease with the Commonwealth of Pennsylvania constituted a
“public work” within the meaning of the Act because the project will not be financed,
in whole or in part, by public funds. For the reasons that follow, we reverse the
adjudication of the Board.
The relevant facts found by the Board, based on the stipulations of
Developer and the Bureau of Compliance, follow. Developer owns land in Hanover
1
Act of August 15, 1961, P.L. 987, as amended, 43 P.S. §§165-1-165-17.
Township, Luzerne County. On July 22, 2019, the Commonwealth, by the
Department of General Services, executed a 20-year lease of a facility to be
constructed by Developer and used by the State Police as a barracks and training
center. Board Adjudication, 5/17/2022, Finding of Fact (F.F.) ¶¶4, 7, 10. Developer
hired “at its own expense” engineers, architects, and others “to develop plans and
specifications incorporating the State Police requirements set forth in the Lease.”
Id., F.F. ¶6. Developer selected the contractors to prepare the site and build the
facility. Id., F.F. ¶13. To help finance the construction, Developer obtained a bank
loan in the amount of $15,400,000. Id., F.F. ¶15. The bank loan is secured by
Developer’s land, the facility to be built, Developer’s personal guarantee, and an
assignment of all leases. Id., F.F. ¶17. Developer is required “to provide its personal
funds to pay for the entire project” of $17,158,680. Id., F.F. ¶15. Upon completion
of construction, the State Police will “take occupancy of the building facilities, as
Tenant, and begin lease payments[.]” Id., F.F. ¶10.
The predevelopment lease provides that if the Commonwealth
terminates or cancels the lease before completion of the 20-year term, the
Commonwealth will reimburse Developer “for any unamortized costs of
renovations,” but this will leave Developer “with a loss of any difference between
the total project and unamortized costs.” Board Adjudication, 5/17/2022, F.F. ¶11.
The “amortized construction costs of the project” are $15,615,940. Id., F.F. ¶12.
In response to a request from Developer for confirmation that its
construction of the facility to be leased to the Commonwealth was not subject to the
Act, the Bureau of Compliance informed Developer that the Act “covers this
construction project.” Certified Record, Item 1, at 5. The Bureau explained that
although Developer “will provide the initial funds for this project, the lease
2
payments from the State Police will reimburse this initial outlay, and, as such, are
the ultimate source for this construction.” Id. at 6.
On February 14, 2020, Developer filed a grievance with the Board,
seeking review of the determination of the Bureau of Compliance. Neither party
requested an evidentiary hearing to augment the stipulated facts. Following
argument, the Board issued an adjudication denying Developer’s grievance and
affirming the Bureau’s determination.
In reaching this conclusion, the Board was guided by the Pennsylvania
Supreme Court’s holding in Pennsylvania National Mutual Casualty Insurance
Company v. Department of Labor and Industry, 715 A.2d 1068, 1074 (Pa. 1998)
(Penn National I). Therein, the Supreme Court explained that under the Act, a
“public work” is one that involves (1) certain work, (2) performed under contract,
(3) paid for in whole or part with funds from a public body, and (4) at a cost in excess
of $25,000. Id. The Board concluded that Developer’s construction satisfied all four
elements. It emphasized that because Developer’s loan agreement required the
Commonwealth’s lease payments to be sufficient to cover Developer’s debt service,
this established funding by a public body. Board Adjudication, 5/17/2022, at 10.
Specifically, Developer would recover its amortized construction costs of
$15,615,940 either through rental payments or reimbursement of unamortized costs
should the lease terminate early. Id. The Board further observed that the lease
required the facility to satisfy State Police design needs; required construction to be
completed within a specific timeline; and included a provision, standard in all
Commonwealth leases, that “Lessor” had to comply with the Act. For these reasons,
the Board concluded that the agreement did not establish a landlord-tenant lease but,
rather, a “public work,” or construction contract, subject to the Act.
3
Developer appealed the denial of its grievance to this Court.
On appeal,2 Developer raises eight issues, which effectively turn on the
single legal question of whether construction of the facility is public work subject to
the Act.3 Developer argues that the project is not public work, and the Bureau rejoins
that it is.4
We begin our analysis with a review of the Act. The Act is a remedial
statute that ensures that workers employed on public works are paid “[n]ot less than
the prevailing minimum wages[.]” Section 5 of the Act, 43 P.S. §165-5. The Act
defines “public work” as follows:
[C]onstruction, reconstruction, demolition, alteration and/or
repair work other than maintenance work, done under contract
2
This Court’s review of an administrative agency’s order determines whether findings of fact are
supported by substantial evidence, whether constitutional rights have been violated, and whether
the determination is in accordance with law. Bologna v. Department of Labor and Industry, 816
A.2d 407, 410 n.3 (Pa. Cmwlth. 2003). Our review of questions of law is plenary. Tomaskevitch
v. Specialty Records Corporation, 717 A.2d 30, 32 (Pa. Cmwlth. 1998). The Court will not
overturn an exercise of administrative discretion unless the agency has abused its discretion or
acted in an arbitrary or capricious manner. International Brotherhood of Electrical Workers v.
Department of Labor and Industry, Prevailing Wage Appeals Board, 816 A.2d 1220, 1223 (Pa.
Cmwlth. 2003).
3
Developer states the issues as follows: (1) whether the Board erred, acted arbitrarily, and/or
abused its discretion in rendering its May 17, 2022, adjudication; (2) whether Developer made a
prima facie case, thereby shifting the evidentiary burden to the Bureau of Compliance; (3) whether
the Bureau of Compliance met its burden of proof of establishing the Act applies to the lease in
question; (4) whether the lease was actually a “public work” construction contract under the Act;
(5) whether the rent to be paid by the Commonwealth, per the lease, actually constitutes public
financing for construction; (6) whether the Commonwealth, as tenant under the lease, was
allocated or assumes any risk of loss for Developer’s construction loan obligation or costs for the
project; (7) whether the Act applies to Developer as a private developer and landlord using private
funds to construct a building it owns and will continue to own; and (8) whether the language of
the lease, which is statutorily required to be included in all agreements to which the
Commonwealth is a party, is determinative of the Act’s applicability. Developer Brief at 3-5.
4
The Bureau of Compliance filed a notice of intervention in this matter, and the Board notified
this Court that it was a disinterested party.
4
and paid for in whole or in part out of the funds of a public body
where the estimated cost of the total project is in excess of
twenty-five thousand dollars ($25,000), but shall not include
work performed under a rehabilitation or manpower training
program.
Section 2(5) of the Act, 43 P.S. §165-2(5) (emphasis added). It is not disputed that
the Commonwealth is a “public body.” As summarized by our Supreme Court, the
Act makes a “public work” one that meets four requirements:
(1) there must be certain work;
(2) such work must be under contract;
(3) such work must be paid for in whole or in part with public
funds; and
(4) the estimated cost of the total project must be in excess of
$25,000.
Penn National I, 715 A.2d at 1074. Notably, “public work” does not require a
“public body” to be directly involved, “only that the project must be paid for in
whole or in part with public funds.” Lycoming County Nursing Home Association,
Inc. v. Department of Labor and Industry, Prevailing Wage Appeals Board, 627
A.2d 238, 242 (Pa. Cmwlth. 1993).
In any challenge to a determination of the Bureau of Compliance, the
grievant bears the burden of proof. See 34 Pa. Code §213.8(j) (“The General Rules
[of Administrative Practice and Procedure, 1 Pa. Code §§31.1-35.251,5] govern
evidentiary hearings. The burden of proof shall be on the grievant.”); see also Butler
Balancing Company, Inc. v. Department of Labor and Industry, Prevailing Wage
Appeals Board, 780 A.2d 840, 842 n.6 (Pa. Cmwlth. 2001). It is the burden of the
5
Section 213.1 of the Board’s regulations states that “[u]nder 1 Pa. Code §31.1 (relating to scope
of part), 1 Pa. Code Part II (relating to general rules of administrative practice and procedure) is
applicable to the activities of, and proceedings before, the Board, of the Department [of Labor &
Industry], except as otherwise provided in this chapter.” 34 Pa. Code §213.1.
5
grievant to adduce evidence that a “predevelopment lease” constitutes a bona fide
lease. Thereafter, the burden shifts to the Bureau of Compliance to “establish that
the economic reality of the transaction is different from its appearance.” 500 James
Hance Court v. Pennsylvania Prevailing Wage Appeals Board, 33 A.3d 555, 573-
74 (Pa. 2011). The allocation of financial risk is a key aspect of the Bureau of
Compliance’s burden to prove untoward “evasive drafting” of a lease agreement that
was done to avoid the Act. Id. at 572. The party with the burden of proof must
adduce “sufficient evidence such that, in the absence of something else from the
opposing party, he should prevail.” Id. at 575. Stated otherwise, it is “incumbent
upon the opposing party to undermine that case in some way.” Id. at 576.
With this background, we turn to Developer’s argument that the Act
does not apply to its construction project because the Commonwealth does not own
the land; did not hire Developer to construct the facility for the Commonwealth to
own; and did not provide any funding for the construction of the facility that will be
leased to the State Police. Developer used its own funds, including a bank loan, to
purchase the land and construct the facility to be leased. The only funds ever to be
generated from a “public body” will “be in the form of rent” and only after the
construction is complete and the State Police takes occupancy. Developer Brief at
11-12. The rent payments merely give the State Police the right to occupy the land
and the facility.
Specifically, Developer contends its predevelopment lease with the
Commonwealth does not satisfy all of the four elements of a public work. See Penn
National I, 715 A.2d at 1074. The contract is a landlord-tenant lease and not a
contract for construction of “certain work,” and no part of the construction will be
paid by public funds. Developer did not receive an advance from the
6
Commonwealth to help fund the construction of the facility. The risk of loss
associated with an “early termination of the Lease and breach of the Construction
Loan” is borne solely by Developer. Developer Brief at 12.
Developer argues that because the record established that the contract
constituted a bona fide lease, the burden shifted to the Bureau of Compliance “to
present evidence that the economic reality of the transaction is contrary to what it
appears to be.” Developer Brief at 12. However, the Bureau offered no evidence
relative to the economic reality of the lease agreement.
In response, the Bureau of Compliance contends that the
predevelopment lease has placed the financial risk of the construction upon the
Commonwealth because it must cover unamortized construction costs should the
lease terminate early. Further, the lease has a potential 30-year duration, should it
be extended, which constitutes a real estate transfer, at least for purposes of the tax
laws. This supports the Board’s conclusion that Developer has been engaged to
construct a “public work” within the meaning of the Act. Bureau Brief at 13-14.
The leading precedent is 500 James Hance Court, 33 A.3d 555, where
our Supreme Court considered whether the construction of a building for a charter
school was a public work subject to the Act.6 The charter school’s non-profit
6
The project in 500 James Hance Court was divided into two parts: one was for the construction
of the building and the other was for the interior or “fit out” of the building to be used as a charter
school. The “fit out” was to be financed by a foundation and, thus, subject to the Act. The
construction of the “shell” was privately funded. The Bureau of Compliance took the position that
if the project had proceeded under one contract, the entire project would have been subject to the
Act. Notably, our Supreme Court determined that “there does not appear to be any reason why
parties to a contract or lease cannot modify their relationship to account for legal requirements
(such as prevailing wages) which may attach to one, but not another, manner of transacting.” 500
James Hance Court, 33 A.3d at 570. The Supreme Court found a “strong and logical” demarcation
between the construction of the building shell and the customizing of the interior. Id. at 570-71.
Accordingly, it held part of the construction project was subject to the Act and part was not.
7
foundation provided financing for the construction of the building through bonds
issued by a public authority. The predevelopment lease between the developer and
the charter school had a duration of 24 years, with an option to purchase after the
first 5 years, and the lease payments were expected to cover the cost of construction
within 6 years.7 The building was to be used exclusively as a charter school, and
approximately a quarter of the total construction cost was attributed to customizing
the building for the particular needs of the charter school.
The Supreme Court explained that the “labels appended to transactional
documents do not exclusively determine the applicability of regulation under the []
Act, as the potential for evasion and artifice is too great. Rather, as in other settings,
the economic reality of the transaction should control.” 500 James Hance Court,
33 A.3d at 572 (emphasis added). To that end, the Supreme Court considered
whether the charter school’s rental payments under the lease, expected to cover
construction costs in six years, were tantamount to public financing. In concluding
that the rental payments did not constitute public funding, the court explained as
follows:
[T]here is little indication that the lease payments by the
Foundation were designed to be anything other than
compensation for use of the building . . . . [T]he Bureau of
Compliance highlights that, at oral argument, Appellees
indicated that the lease payments would allow construction costs
to be recouped in six years . . . . However, it is evident 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. Even to the degree this factor focuses on the prospect
that the Foundation’s lease payments will, alone, allow for such
7
Notably, unlike the lease in 500 James Hance Court, 33 A.3d 555, the Commonwealth does not
have an option to purchase the facility after five years.
8
recoupment, such a circumstance remains of little probative
value relative to the question of whether the lease is a disguised
construction contract, absent proofs regarding whether a six-year
recoupment period is substantially shorter than the industry norm
for building shells of the type involved here.
Id. at 574 (emphasis added). The Supreme Court further explained that the Bureau
of Compliance had given no weight to the fact that the premises reverted to the
developer at the end of the lease:
Absent a finding – or even an allegation – that the building’s
useful life is likely to be no greater than the 24-year lease term,
we find this reasoning counter-intuitive because such reversion
facially supports Appellees’ position that the lease is a bona fide
one and not a construction contract.
Id. at 575. In short, under 500 James Hance Court, a developer’s recoupment of its
costs of construction through rental payments does not transform a lease into a
“disguised construction contract.” Id.
In Ursinus College v. Prevailing Wage Appeals Board, 280 A.3d 1113,
1123 (Pa. Cmwlth. 2022), petition for allowance of appeal granted, (Pa., No. 18
MAP 2023, filed February 22, 2023), this Court considered whether a $23,000,000
construction project undertaken by a private college, but financed by bonds issued
by a public authority, constituted a public work subject to the Act. The Board
determined that because the construction was funded by loans from a public
authority, it was paid for by a public body. Accordingly, the prevailing wage
requirements of the Act applied to the construction.
This Court reversed the Board’s adjudication. The bond documents
required the public authority to transfer the funds to a trustee, which transfer
occurred before the college received any funds. Accordingly, the college used funds
disbursed by the trustee, and not by the public authority, to pay for the project. The
9
economic reality of this transaction was that the project was not funded “out of the
funds” of a public body. We rejected the Board’s reasoning that the project was
subject to the Act because the college “would not have had this funding stream
available but for the existence of the [a]uthority and its coordination of the funding
through its statutory powers as a public body.” Ursinus College, 280 A.3d at 1123
(emphasis added). We explained that Section 2(5) of the Act is not triggered by a
“but for” test but, rather, requires the work be paid for “out of the funds” of the
public body. The college, not the public authority, bore the risk for repayment of
the bonds. As such, the economic reality of the transaction revealed that the project
was not a public work subject to the Act.
Here, as in 500 James Hance Court, the predevelopment lease states
that the State Police shall pay rent “for the use and occupancy of the [p]remises” and
not for construction. Reproduced Record at 37 (R.R. __).8 As in Ursinus College,
Developer has funded the cost of construction and solely bears responsibility for the
repayment of the construction loan. Developer and the Bureau of Compliance
stipulated:
[T]he Project has been purchased and funded totally through the
use of [Developer’s] private funds, and that no funds will be
provided directly by the Commonwealth for the purchase,
development and construction of the facilities.
Stipulated Facts, ¶20; R.R. 30 (emphasis added). The parties agreed that Developer
bears the “risk of losing substantial funds” notwithstanding the Commonwealth’s
agreement to reimburse Developer for unamortized costs should the lease be
8
Rule 2173 of the Pennsylvania Rules of Appellate Procedure specifies: “[T]he pages of . . . the
reproduced record . . . shall be numbered separately in Arabic figures . . . thus 1, 2, 3, etc., followed
in the reproduced record by a small a, thus 1a, 2a, 3a, etc.” PA. R.A.P. 2173. Because Developer’s
Reproduced Record page numbers are not followed by a small “a,” for ease of reference, this
opinion refers to the reproduced record pages as numbered by Developer.
10
terminated early. Stipulated Facts, ¶11; R.R. 30. In short, the economic reality is
that Developer provided the funds for the construction of the facility to be leased to
the Commonwealth.
Although the predevelopment lease requires the Commonwealth to
reimburse Developer for any unamortized costs after “the expiration of at least fifty
percent (50%) of the initial term of this Lease,” i.e., 10 years, this did not transform
the lease into a disguised construction contract. Lease, III, ¶8; R.R. 38. An early
termination of the lease at the end of year 10, for example, would leave unamortized
costs substantially below $15,615,940, possibly as little as half that amount. See
Developer Brief at 19-20. Should the Commonwealth become responsible for the
unamortized portion of the costs, Developer will nevertheless be liable for as much
as $10 million on the bank loan. Id. As in Ursinus College, construction of the
facility does not come out of funds of a public body, and the risk for repayment of
the loan is not borne by a public body.
The Board erred in holding that the lease was not a bona fide lease.
Improperly, the Board gave no weight to the fact that the Developer holds a
reversionary interest in the building under construction. In 500 James Hance Court,
33 A.3d at 575, our Supreme Court observed that such a reversionary interest in a
predevelopment lease to the developer “facially” supports the conclusion that “the
lease is a bona fide one and not a construction contract.”
Because Developer established a bona fide lease, the burden shifted to
the Bureau of Compliance. It did not present any evidence that the contractual
arrangement was not as it seemed. The Bureau presented no evidence, for example,
that the reversionary interest was fictional because the building would cease to be
useful by the end of the lease term. Likewise, it presented no evidence that
11
Developer’s recoupment of construction costs by rental payments was “substantially
shorter than the industry norm.” 500 James Hance Court, 33 A.3d at 574.
We reject the Board’s suggestion that the standard lease appended to
the agreement is relevant to the determination of whether the predevelopment lease
involves a public work. Paragraph 32 of “Attachment A,” “Lease Standard Terms
and Conditions,” relates to “Payment of Prevailing Minimum Wages.” It states, in
relevant part, as follows:
Lessor and Lessor’s contractor(s) must comply with the
following conditions, provisions, and requirement in the
construction of the building, substantial rehabilitation of the
building and/or substantial alterations to the Premises:
(a) Lessor and Lessor’s contractors shall pay at
least the wage rates as determined by the
Secretary of the Pennsylvania Department of
Labor and Industry and shall comply with the
conditions of the [Act] and the regulations
issued thereto, to assure the full and proper
payment of the rates.
R.R. 52 (emphasis added). Additionally, Developer and the Bureau of Compliance
stipulated:
Section 9.101(a) of [the Board’s regulation, 34 Pa. Code
§9.101(a),] requires that any and all agreements in which the
Commonwealth is a party contain language requiring compliance
with the Act. Accordingly, as the Commonwealth is a party to
the Lease, it satisfied this statutory requirement by including
language that work performed comply with the Act.
Stipulated Facts, ¶8; R.R. 29.
The question of whether Developer has a contractual obligation to pay
prevailing wages was not before the Board, and it is not before the Court in this
appeal. The Board determines questions arising under the Act; its jurisdiction does
12
not extend to matters of contract interpretation and dispute. Likewise, this Court
does not determine what, if any, contractual obligation was undertaken by Developer
in Paragraph 32 of Attachment A.
Finally, the Bureau of Compliance argues that the predevelopment
lease effected a real estate transfer under Section 1102-C of the Tax Reform Code
of 1971,9 which treats a build-to-suit lease with a term of 30 years as a transfer that
triggers a realty transfer tax. Here, the lease agreement provides for one, 20-year
term followed by two, 5-year renewal terms. The Bureau of Compliance asserts that
a 30-year lease is not typical in a landlord-tenant relationship, which supports the
conclusion that the nature of the contract is not a lease between a landlord and tenant.
We reject this argument. First, the Board did not base its adjudication
on this argument. Second, renewal of the lease agreement beyond the initial 20-year
term is speculative, not certain. However, even assuming the lease effected a real
estate transfer for purposes of the tax laws, this is not a factor to be used to determine
whether the lease is a construction contract for a public work. Penn National I, 715
A.2d at 1074.
Developer made a prima facie case that its lease was a bona fide lease
by showing that funding for construction of the facility to be rented did not come
from a public body. Rather, Developer bears the financial risk, and it retains a
reversionary interest in the land and the buildings. It was the Bureau of
Compliance’s burden to present evidence to “establish that the economic reality of
the transaction is different from its appearance,” 500 James Hance Court, 33 A.3d
at 573-74, and it did not do so. That Developer expects, in time, to recover costs of
9
Act of March 4, 1971, P.L. 6, as amended, added by the Act of May 5, 1981, P.L. 36, 72 P.S.
§8102-C.
13
construction did not convert the bona fide lease into a construction contract. As our
Supreme Court has explained, if developers did not expect to cover their
construction costs with rental payments, few commercial buildings would ever be
built. Id. at 574. The Bureau of Compliance presented no evidence that the timeline
for Developer’s expected recoupment of construction costs was “substantially
shorter than the norm.” Id.
For these reasons, we reverse the Board’s determination that the Act
applies to Developer’s construction of a building that will be leased to the
Commonwealth.
____________________________________________
MARY HANNAH LEAVITT, President Judge Emerita
14
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
PSP NE, LLC, :
Petitioner :
:
v. : No. 576 C.D. 2022
:
Pennsylvania Prevailing Wage :
Appeals Board, :
Respondent :
ORDER
AND NOW, this 30th day of March, 2023, the May 17, 2022,
adjudication of the Pennsylvania Prevailing Wage Appeals Board is REVERSED.
____________________________________________
MARY HANNAH LEAVITT, President Judge Emerita