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Hensel Phelps Construction Company et al v. San Diego Unified Port District

July 26, 2011


APPEAL from a judgment of the Superior Court of San Diego County, William R. Nevitt, Jr., Judge. (Super. Ct. No. 37-2008-00086718-CU-PT-CTL)

The opinion of the court was delivered by: Irion, J.



California's prevailing wage law (Lab. Code, § 1720 et seq.) (the PWL)*fn1 provides that, with certain exceptions, the prevailing wage "shall be paid to all workers employed on public works." (§ 1771.) In this appeal we consider whether a hotel construction project on land that the San Diego Unified Port District (the Port District) leases to the hotel owner qualifies as a public work within the meaning of the PWL where the lease specifies that the Port District will provide what the lease refers to as a "rent credit" in the total amount of $46.5 million during the first 11 years of the lease.

In ruling on a petition for writ of mandate (Code Civ. Proc., § 1085) from a decision of the Department of Industrial Relations (DIR), the trial court held that the hotel construction project was not a public work subject to the PWL, and it therefore granted the petition. On our independent review of the question of statutory interpretation presented to us, we disagree with the trial court. The hotel project, which was constructed pursuant to the terms of the lease with the Port District, is a public work because (1) it constitutes "[c]onstruction . . . done under contract" (§ 1720, subd. (a)(1)); and (2) the construction was "paid for in whole or in part out of public funds," within the meaning section 1720, subdivision (a)(1), due to the $46.5 million in rent credit provided by the Port District in the lease. Accordingly, we conclude that the PWL is applicable to the hotel construction project, and we reverse the judgment.



A. The Port District's Negotiations for Development of a Hotel on the Property

The Port District is a public corporation created by the Legislature (Harb. & Nav. Code, App. 1, § 1 et seq.).*fn2 Among the properties that the Port District has the authority to offer for lease is a waterfront parcel near the San Diego Convention Center, commonly referred to as the Campbell Shipyard site (the Property). The Port District had attempted to develop a hotel on the Property for several years, but negotiations with potential developers were unsuccessful.*fn3

The Port District renewed its development efforts in early 2002 by issuing a request for proposal (RFP) for a hotel to be built on the Property. The term sheet for the RFP provided, among other things, that the Port District was seeking the construction of "[a] four-star quality convention center headquarters hotel, not exceeding 499 feet in height and containing 1,000 - 1,200 guestrooms," with a 35,000 square foot ballroom and "amenities such as restaurants, cocktail lounges, retail space, a swimming pool and health spa." The term sheet specified that rent would be paid to the Port District calculated as a percentage of the gross income generated from hotel operations, including 7 percent of the gross income from rental of guest rooms, 3 percent of the gross income from food sales, and 5 percent of the gross income from beverage sales. During construction, a minimum annual rent payment of $2.25 million was to be paid to the Port District for the first two years and, upon opening of the hotel, a minimum annual rent of $4.5 million was to be paid for the third through 20th years.

The Port District received four proposals for development of the hotel, one of which was from Hilton San Diego Convention Center, LLC (HSDCC). HSDCC's response to the RFP estimated total project costs at $292.5 million and stated, "Our financial analysis indicates the [Port] District will need to consider economically supporting the project."

The Port District selected the HSDCC proposal and, in August 2002, entered into an option agreement with HSDCC. The proposed terms of the lease negotiated at the time of the option agreement provided that HSDCC would receive a rent credit equal to 60 percent of the rent due each month for 11 years, not to exceed a total of $46.5 million. The rent credit was explained in the agenda for the meeting at which the Port District's Board approved the option agreement with HSDCC: "When negotiations commenced . . . , it was known that HSDCC was requesting a $26.5 million cash subsidy payable at, or shortly after, lease commencement (the other three proposers . . . also requested subsidies up to as much as $80 million). The Option Agreement provides for the $26.5 million subsidy to be taken by HSDCC in the form of rent credits, equal to 60% of rent due, until $46.5 million (which includes interest at a rate approximately equal to 8.4%) has been received or 11 years, which ever occurs first."

In April 2005, during the term of the option agreement, HSDCC wrote to the Port District to advise that its construction costs had increased, and therefore it needed additional financial support from the Port District or other public entities to ensure that the project could go forward. HSDCC noted that the additional financial support was warranted "considering the one-billion-dollar economic impact this project will have to the surrounding community upon completion." In September 2005, HSDCC again wrote to the Port District explaining that project costs had increased to approximately $350 million and requesting an acceleration of the rent credit.

In response to these requests, the Port District in November 2005 approved an amendment to the proposed lease terms to provide for a 100 percent rent credit for the first two years, instead of a 60 percent credit, which was expected to result in an approximate $3 million savings to HSDCC.*fn4

HSDCC assigned its option to One Park Boulevard, LLC (OPB), and in December 2005, the Port District and OPB entered into a lease agreement (the Lease).

B. The Lease

The Lease between the Port District and OPB grants a 66-year lease of the Property to OPB exclusively for the purpose of an "upscale major convention-center-oriented headquarters hotel" with 1,100 to 1,200 guest rooms, banquet and conference rooms, restaurant and cocktail lounges, retail space and a "public park/plaza of 4.3 acres" open daily for public use (the Project). The Lease provides that OPB shall pay rent according to a schedule of percentage rents for various income producing activities by the hotel, with the possibility of an increased percentage in certain years if OPB exceeds its projected gross income.*fn5 The Lease also provides that the Port District is entitled to receive a guaranteed minimum annual rent, which during the first two years of the Lease is $2,250,00, and for the third through 20th years of the Lease is $4,500,00.*fn6 For periods beyond those dates, the Lease states that the parties are to mutually agree upon the rent at the beginning of each subsequent 10-year period, with resort to arbitration if necessary.

Consistent with the parties' negotiations during the RFP process and the option period, the Lease also provides for a "rent credit," which is to be applied until the credit equals $46.5 million, or December 31, 2016, whichever occurs first.*fn7 The rent credit consists of: (1) 100 percent of the monthly rent until the 34th month of the Lease, unless construction is not completed by that month, in which case the 100 percent credit may extend up to the 36th month; and (2) 60 percent of the rent thereafter.

The Lease requires that construction begin within two months, that the Port District approve the plans and specifications for the Project, and that OPB spend a minimum of $220 million on improvements at the Project.

According to the Lease, title to the buildings and other improvements on the Property will be vested in OPB, except that upon the termination of the Lease, the Port District will have the option to have the improvements removed at the expense of OPB, and will obtain title to any improvements that are not timely removed in response to its request.

After the Lease was executed, OPB contracted with Phelps Portman San Diego, LLC (Phelps Portman) to serve as the developer of the Project, and Phelps Portman contracted with Hensel Phelps Construction Co. (Hensel Phelps) to serve as the construction manager.

The Port District required Hensel Phelps to execute a completion guaranty, in which it guaranteed, among other things, "the completion and construction of the Project" in a timely manner, in accordance with the terms of the Lease and the plans defined therein.

Construction on the Project started in 2006.

C. Proceedings in the Department of Industrial Relations

Under a regulatory provision allowing any interested party to file a request with the DIR to determine whether a specific project is covered by the PWL (Cal. Code Regs., tit. 8, § 16001), Carpenters/Contractors Cooperation Committee, Inc. (CCCC) and Southern California Labor/Management Operating Engineers Contract Compliance Committee (Operating Engineers Committee) requested a determination from the DIR that the Project was a public work subject to the PWL.

On April 1, 2008, DIR's Director (the Director) issued an initial determination that the Project was a public work subject to the PWL. The initial determination concluded that (1) the Project involved "[c]onstruction . . . done under contract" within the meaning of section 1720, subdivision (a)(1)); and (2) the construction was "paid for in whole or in part out of public funds" because that term is defined by statute to include "rents . . . that are . . . paid, reduced, charged at less than fair market value, waived or forgiven" (ยง 1720, subd. (b)(4)) and the rent credit in the Lease constituted a reduction in rent. Hensel Phelps and Phelps Portman administratively appealed the initial determination. (See Cal. ...

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