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Ruling Hits California Developers

ALAMEDA, Calif. — A recent California appeals court ruling will require developers of many community facilities districts to pay so-called prevailing wages for all public improvements, whether or not they are financed with bonds.

The development could make it more difficult for many such projects to get off the ground, according to Los Angeles public finance and real estate attorney Lewis Feldman.

“It just adds to expenses associated with infrastructure provided by private developers,” said Feldman, who heads the public-private development practice at Goodwin Procter LLP, which highlighted the case in its monthly Public Finance Update publication.

The ruling came in late December in the case Azusa Land Partners LLP v. Department of Industrial Relations.

The developers petitioned the California State Supreme Court for a review on Friday, said their attorney, Patrick Perry. The high court has up to 90 days to decide if it will hear the case.

The lawsuit stems from a 517-acre community facilities district in the Southern California city of Azusa, on which developers planned a primarily residential development. To finance its public infrastructure, they used a $71.1 million bond issue in 2007, backed with a special tax on the community facilities district — a Mello-Roos bond in California parlance.

The state’s Department of Industrial Relations became involved, and in 2007 issued a determination that requires payment of union-scale prevailing wages on public infrastructure in the district that is not being financed by the bonds.

If the appellate court ruling stands, it could have a critical impact on the viability of some developments financed using Mello-Roos bonds, Feldman said.

There’s no question that state law requires prevailing wages on projects paid for with bond money, he said. But the court’s ruling extends the reach of the prevailing-wage requirements to every public improvement that is required to be built as a condition for regulatory approval of the project.

That puts developers in the position of having to pay higher wages even for ­relatively simple work, such as park landscaping, according to Feldman.

The ruling will impact a certain subset of potential projects, he said. The appellate court ruling specifically affects so-called general law cities, such as Azusa.

Cities that have adopted a charter have more discretion to set their own policies, Feldman said. But general law cities, which tend to be smaller, are more tightly bound by state statutes.

The ruling won’t have an impact in big cities like Los Angeles and San Francisco, where political reality dictates prevailing wages on any project where there is public financial involvement, he said. But it will make a difference in smaller suburban and urban developments.

“What this does is it makes people, ­developers and public-private partnership folks, and governments that need to induce development for jobs, think twice about the economics of a project,” ­Feldman said.

Residential development has already been hit hard by the California housing bust.

The prevailing wage issue is only one of the problems facing the Azusa development, and a relatively small one, according to disclosure documents filed in connection with the Azusa Community Facilities District No. 2005-1 bonds on the Municipal Securities Rulemaking Board’s EMMA site.

In 2009, the original developer defaulted on a promissory note to lender San Diego National Bank, which was itself later ­taken over by the Federal Deposit Insurance Corp. The FDIC ultimately ­transferred the San Diego bank’s assets to U.S. Bank ­National Association, which sold the Azusa property to a new developer, the disclosure report said.

“As a result of deteriorating overall market conditions, lot sales in all planning areas have halted and projections regarding remaining lot sales have been suspended,” said the disclosure, filed in September.

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