It's Summertime: Another Contractor Stung by PWL in PPP

In Hensel Phelps Construction Co. v. San Diego Unified Port District (published July 26, 2011) the California Court of Appeal handed a prevailing wage bill to the general contractor of a $350 million hotel development project.  Odd, you might say, because the project seemed rather private.  The Port leased land on the San Diego waterfront to a developer (OPB) for construction of a hotel.  The lease term was for a long time, 60 years, and at the conclusion of the lease the land was to be delivered free and clear of the improvement.  In the meantime, the developer was to pay rent of $4.5 million per year ($2.25 during construction), plus 7% of room rental proceeds, 3% on food, and 5% on drink.  OPB hired a developer, who in turn hired Hensel Phelps Construction.  They apparently did not pay prevailing wages and the carpenters and laborer unions sued.

In making these wage and hour determinations, courts usually look to three things: 1) the nature of the ownership of the project, 2) whether the project is funded in part with public money, 3) and whether the project serves a public or private purpose.  See my recent article in The Procurement Lawyer.  In this case, none of these criteria jump out at you.  Although the Port owned the ground lease, the hotel project in this case was undoubtedly privately owned.  Similarly, although a hotel in the area would provide a shot in the arm for the neighborhood, operation of a private hotel does not seem particularly public in nature.  Finally, the Port District did not directly contribute any funds to the project. 

However, there wasa strong interest by the Port to have a hotel developed on the property.  Presumably they felt this was the highest and best use for the general development of the area.  In that sense, the project had a public purpose similar to the City of New London’s purpose in the Kelo case (U.S. Supreme Court takings case).  The Port District in this case attempted for many years to find a developer to build a hotel.  The Port provided specifications for the project.  In effect the Port lent the project a public air by taking such a keen interest in how they wanted the property developed. 

Ultimately, however, the case turned on statutory interpretation on the use of public funds.  The California Labor Code provides that prevailing wages must be paid on any project that is built in whole or in part with public funds, and the statute specifically provides that forbearance of rent counts as public funding.  In this case the developer advised the Port up front that the project did not pencil with the initially negotiated rents unless some of the rent was forgiven.  The Contractor and Developer argued that the lease agreement simply restructured the reasonable lease payments:  there was no lease obligation to be forgiven before the lease was signed and so this shouldn’t count as a “forgiving” of rent under the statute.  This argument was rejected. 

The moral of the story is, if a public entity has a strong interest in how a project is developed this may persuade a court that the project has a public character, even though it may be strictly private in ownership and use;  above all, however, pay very close attention to the applicable prevailing wage statutes in your jurisdiction whenever a public entity is involved, even if very periphorally.  One can’t tell from the opinion who will ultimately get stung here by this unexpected cost—suffice it to say it will not be pleasant. 

Brownfield Bloom and Nostalgia

My legal career started as a deputy prosecuting attorney in King County Seattle.  At the time I lived on a sailboat on the south side of Lake Union and conducted trial strategy meetings during Tuesday night beer can races.  The area between the south end of the lake and downtown, pictured here, has undergone many changes since then. 

Here is an article  in the WSJ about the 6.4 million of office space that Paul Allen's Vulcan has developed in this area since 2004.   If anyone has knowledge about this brownfield development, that would be an interesting discussion for a monthly call in meeting, hopefully for more than those of us who used to live on a boat on Lake Union.  

Alternative Energy Funding

Interesting article from May 2011  in the WSJ discussing financing of large alternative energy projects. 

To date the DOE has approved financing for 27 major projects, totaling 30 billion in loan gauarantees.  Of these, 16 projects have been funded, including Brightsource's  Ivanpah project near Las Vegas, currently being constructed by Bechtel.  The Brightsource Ivanpah project is the largest solar thermal project currently under construction worldwide and it will nearly double the amount of solar thermal energy being produced today.  The 845 MW Shepards Flat wind farm in Oregon's Columbia River Gorge is sponsored by GE Energy Financial Services and is funded with a mix of bonds, floating loans, and equity capital, with an 80% DOE loan guarantee.  In the meantime, developers of Cape Wind (the irritant of Kennedys) are looking for a 20 percent equity stake from Barclay's Investments and an 80 percent loan guarantee from the DOE's program for innovative technologies. 

As government support for these alternative projects is bound to wane in the current budget picture, the question will be whether enough of these projects currently underway can prove themselves so private capital will step in to finance future projects without, or with fewer, government loan guarantees.  Let's hope so.

These projects are dominated by technology and financing.  Nevertheless, there is a valuable role to be played by those of us versed in construction delivery models in allocating the risks and responsibilities between the parties.

About Trains

Trains are great.  On my way to the ABA Forum planning retreat, Chicago O'Hare was shut down and disrupted for hours.  So instead of arriving in Albany, NY at 7:00 p.m. I wound up at Newark, NJ at 5:00 a.m. on 4 hours sleep in 48 hours.  I tried to rent a car for the three hour drive up to Lake George, but they wanted $800 for the week . . .and I revolted.   I walked across the track and took the train to New York's Grand Central, and transferred to "The Adirondak", train 69 heading for Montreal, at 8:15 a.m.   I thoroughly enjoyed the four hour trip up the Hudson river valley.  It made me wonder why we don't ride the train more often. 

Friday, July 1, 2011 was opening day for the $35.5 billion Bejing-Shanghai bullet train.  The plan is to run 90 trains per day each way, meaning a train will leave every 10 minutes for 16 hours per day.  Wow!  The initial forecast is to move 180,000 passengers each day (about half of the BART system in San Francisco, for example).  At 819 miles, this is the longest high speed rail line in the world. The trip will cost $86 for coach, one way, about half the cost of  flight.   The trip takes less than five hours, no longer than driving to the airport, waiting, and getting to downton Bejing or Shanghai at the other end with scrunched knees; or are Chinese airline coach seats better than ours?

China is undergoing a steel rail boom.  Total investment in new rail lines has grown from $14 billion in 2004 to $26.2 billion in 2007.  In response to the global economic recession, while we wring our hands and shy from increased government involvement,  the Chinese government has accelerated the pace of HSR expansion to stimulate economic growth.  Total investments in new rail lines including HSR reached $49.4 billion in 2008 and $88 billion in 2009. In all, the state plans to spend $300 billion to build a 25,000km (16,000mi) HSR network by 2020.[1]  Jobs created have been 100,000 per year. 

Simens, Bombardier, and Kawasaki are all reported to be involved with technology transfer agreements.  Chinese indigenous technology is quickly catching up, and making its own innovations.  The projects are funded by state owned banks and financial institutions, with the money going to the Ministry of Railways and local governments.  To date, none of the lines are showing a profit. 

Here is a map of the planned railway system. 

If anyone has experience with major project delivery agreements in China, that would be an interesting post for the Triclinium. 

In the meantime, California is working on its own 800 mile high speed rail line from Los Angeles to San Francisco, with service to be expanded to San Diego and Sacramento.  The Chinese are in the hunt to get involved with their surplus cash and rapidly acquired technological expertise. 

Are we paying attention yet?
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fn 1.  This is a very substantial Wikipedia entry on high speed rail in China.  Who does this stuff?!