COVER STORY, NOVEMBER 2009

NO FEES NOT FEASIBLE?
Developers may be asking if government assistance is too good to be true.
David Franklin and Brian Fish

Franklin

In the real estate industry, truly good news is hard to come by these days. Those searching for something to cheer about might have been heartened by recent reports that local jurisdictions and districts are reducing, waiving or deferring development impact fees. Unfortunately, depending on how those fee programs are structured, the agency’s gift could subject otherwise private projects to the dramatically increased costs, hassles and risks of complying with California’s Prevailing Wage laws.

Even seemingly modest development impact fees can quickly add up to millions of dollars for projects of any meaningful size. The financial costs are compounded because most fees must be paid at building permit issuance, causing a project to incur major expenses before it produces any revenue.

To stimulate development and the revenue it creates for local government, many communities are temporarily easing the burden imposed by these fees. Some jurisdictions are reducing the amount of the fees; others are deferring payments until some later date when the project is expected to generate revenue; and some allow developers to apply on a case-by-case basis for a fee deferral or waiver. Under Prevailing Wage laws, the key issue is how the jurisdiction structures its program.

Fish

When someone mentions the words “prevailing wages,” most people immediately think of government-sponsored public works projects such as bridges or roads. However, California Labor Code Section 1720 can convert an otherwise private project into a “public work” for prevailing-wage purposes if the project is paid for in whole or in part out of public funds. The term “public funds” applies to much more than just cash payments from the government. In fact, the expansive list of items that could qualify include fees, costs, rents, insurance and bond premiums or other obligations that would normally be required as a condition of development that are paid, reduced, charged at less than fair market value, waived or forgiven by the state or local jurisdiction.

In terms of impact fee waiver or deferral programs, prevailing wage requirements are most likely triggered if the agency institutes a case-by-case approach. Programs that offer relief to all similarly situated projects should not raise prevailing wage issues as application of the same rules to everyone arguably eliminates any alleged special government benefit. Similarly, if the Governor signs AB 1084, the general impact fee protections, and resulting relief it grants, should not trigger prevailing wages.

Even if acceptance of the benefits of a fee waiver or deferral would otherwise trigger prevailing wage requirements, certain exemptions exist. For example, the acceptance of a fee deferral or waiver may not cause an entire project to be deemed a public work if:

• The governmental entity providing the benefit is a charter city that has different or no prevailing wage policies for private projects

• The development is a residential project exempted from prevailing wage requirements by the Labor Code or by Government Code Section 66007

• Public funds reimburse the developer for costs that normally would be borne by the public

• Public funds are de minimis in the context of the project.

Projects subject to prevailing wages generally have higher labor costs and are subject to a host of new obligations and government reporting requirements. This magnitude of the cost increase varies by area of the state and the type of work. Prevailing wages for each craft, classification and type of worker in a locality are determined by the California Director of Industrial Relations (DIR) based on the standards specified in the California Labor Code. To determine the applicable prevailing wages, one must obtain the appropriate schedules from the DIR for the community in which the project is located. These schedules for journeymen may be accessed at the DIR website: http://www.dir.ca.gov/dlsr/PWD/index.htm.

While the increased costs of complying with prevailing-wage requirements create their own issues, prevailing-wage consequences will fall most heavily upon those who should have paid prevailing wages and did not. Any worker on the project, a disgruntled former employee, the California Department of Labor or other interested parties, such as labor unions or project opponents, could allege that a project receiving a fee waiver or deferral must pay prevailing wages. If it is ultimately determined that prevailing-wage rules apply, the contractor or subcontractor would be required to pay, for each worker, the difference between the prevailing wages and the wages actually paid, plus a penalty of up to $50 per calendar day or portion thereof for each worker paid less than the prevailing-wage rates. If the wage differential assessed is not fully paid within 60 days after the notice of the assessment, an additional sum equal to the amounts remaining unpaid is levied. While the Labor Code states the contractor should be liable for these payments, the contractor may be expected to pursue indemnity or reimbursement claims against the owner. Also, it appears the DIR has begun circumventing the contractor and pursuing prevailing-wage claims directly against owners.

As a first order of business, developers and owners should be aware of the risks posed by certain fee waiver or deferral programs and evaluate whether an offered benefit will potentially trigger prevailing wages. If the answer is yes, the costs of accepting the relief should be thoroughly evaluated in light of prevailing-wage requirements. Further, if it appears prevailing wages will apply, the owner/developer could explore with the applicable jurisdiction the possibility of modifying the program so that the benefits the jurisdiction was hoping to achieve by means of a fee waiver or deferral can be realized.

David Franklin and Brian Fish are partners in the Real Estate Transactional Practice Group at Luce, Forward, Hamilton and Scripps LLP.

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