Opinion ID: 2321104
Heading Depth: 3
Heading Rank: 2

Heading: Pre-Development Lease Scenarios

Text: In terms of the Wage Act, the pre-development lease scenario most closely implicates the element entailing payment, in whole or in part, with public funds, see 43 P.S. § 165-2 (definition of public work), or, under Mosaica I, charter school funds. See Mosaica I, 836 A.2d at 189-90. Facially, the present record establishes, consistent with the March 1, 2007, amended lease, that the building-shell construction phase of the Collegium Charter School project is privately funded. Nevertheless, we agree with the Bureau that the labels appended to transactional documents do not exclusively determine the applicability of regulation under the Wage Act, as the potential for evasion and artifice is too great. Rather, as in other settings, the economic reality of the transaction should control. Cf. Frank Lyon Co. v. United States, 435 U.S. 561, 573, 98 S.Ct. 1291, 1298, 55 L.Ed.2d 550 (1978) (explaining, in the context of federal tax regulation, that [t]he Court has never regarded `the simple expedient of drawing up papers' as controlling ... when the objective economic realities are to the contrary. (citation omitted)). Thus, the question legitimately arises whether the stream of rental payments required under the Foundation/Developer lease arrangement are tantamount to construction financing. The Phoenix Field Office test provides one method for considering the economic reality associated with a pre-development lease. Most of the prongs of the test, however i.e., lease length; government involvement; private versus public use; recapture of construction costs; and evasive drafting, see Phoenix Field Office, Bureau of Land Mgmt., ARB Case No. 01-010, slip op. at 8-11offer only very generalized guidance. The last factor (evasive drafting) is the only one which would seem to bear substantial independent significance if proven. Given the unlikelihood that evasiveness will be conceded, however, in most cases the proofs must circle back to a consideration of the overall circumstances. In view of the looseness inherent in the framing of the Phoenix Field Office factors, we do not believe it would be useful for us to adopt them here. We realize that the Board felt differently, and we acknowledge the substantial deference generally afforded to the interpretation of an enactment rendered by the agency charged with its administration. See Rendell v. Pa. State Ethics Comm'n, 603 Pa. 292, 306, 983 A.2d 708, 716 (2009). Nevertheless, we need not defer uncritically, particularly if we find that the interpretation is imprudent or inconsistent with legislative intent. See Pa. Human Relations Comm'n v. Uniontown Area Sch. Dist., 455 Pa. 52, 77-78, 313 A.2d 156, 169 (1973) (plurality). In particular, we do not believe that the prongs of the Phoenix Field Office test account sufficiently for a key aspect of business transactions, namely, the allocation of risk. Notably, in assessing the economic realities of a particular lease transaction (albeit for purposes of federal income taxation), the United States Supreme Court placed particular emphasis on the risk undertaken by the lessor. The Court explained as follows: Here, ... most significantly, it was [the lessor] alone, and not [the lessee], who was liable on the notes.... Despite the facts that [the lessee] had agreed to pay rent and that this rent equaled the amounts due from [the lessor] to [the secured creditor], should anything go awry in the later years of the lease, [the lessor] was primarily liable. No matter how the transaction could have been devised otherwise, it remains a fact that as the agreements were placed in final form, the obligation on the notes fell squarely on [the lessor]. [The lessor], an ongoing enterprise, exposed its very business well-being to this real and substantial risk. The effect of this liability on [the lessor] is not just the abstract possibility that something will go wrong and that [the lessee] will not be able to make its payments. [The lessor] had disclosed this liability on its balance sheet for all the world to see. Its financial position was affected substantially by the presence of this long-term debt, despite the offsetting presence of the building as an asset. To the extent that [the lessor] had used its capital in this transaction, it is less able to obtain financing for other business needs. Lyon, 435 U.S. at 576-77, 98 S.Ct. at 1300 (footnotes omitted). We agree with the United States Supreme Court (and Appellees) that risk allocation should be a prominent consideration in assessing the economic reality of a business transaction and, in particular, a lease, and that such analysis appropriately extends to the Wage Act setting. While recognizing that the Act is remedial in nature and appreciating the need to contain exceptions, privately financed construction work does not facially implicate the terms of the Act. Therefore, a grievant which presents evidence that it is incurring the risk and obligations of an owner/mortgagor in construction, that there is no public-financing component in the work (or, under, Penn. National I, in the relevant major phase of construction), and that its relationship with the covered entity is as a lessor under a facially legitimate lease, has established a prima facie case that wage regulation is not implicated under the prevailing statute. [24] At such point, we find it appropriate to allocate the burden to the Bureau to go forward with the evidence to establish that the economic reality of the transaction is different from its appearance. [25] Where the Bureau does so sufficiently, the ultimate burden should rest with the grievant. See Henes, 317 Pa. at 310, 176 A. at 506; accord 31A C.J.S. Evidence § 199. Presently, we will not attempt to hypothesize the range of circumstances which might counterbalance a prima facie case in the pre-development lease setting. Rather, we believe it is enough to conclude that the Bureau has not gone forward with the evidence to a sufficient degree such that the ultimate burden should shift back to Appellees. For example, there is little indication that the lease payments by the Foundation were designed to be anything other than compensation for use of the building. To support its contrary finding, the Bureau highlights that, at oral argument, Appellees indicated that the lease payments would allow construction costs to be recouped in six years. See Final Decision & Order, In re 500 James Hance Court, L.P. & Knauer & Gorman Constr. Co., No. PWAB-8G-2006, slip op. at 14-15. 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 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. Cf. 13 Pa.C.S. § 1203(c) (listing factors that do not form a sufficient basis to conclude that a lease creates a security interest in goods, including that the present value of the anticipated stream of rent payments exceeds the value of the goods). In this particular respect, we regard the Commonwealth Court's assessment as an accurate one: The record fails to establish that the rent payments were the equivalent of funding for the construction of the building shell. A review of the lease between [Developer] and the ... Foundation supports [Developer]'s position that it intended to maintain control over its property for a leased term of years and not to sell the property to the ... Foundation. The rent paid by the ... Foundation was in consideration for the use and occupancy of the land or building. [Developer] at all times retained a reversionary interest in the property under the lease as the landlord.... 500 James Hance Court, 983 A.2d at 803-04 (footnotes and citation omitted). [26] Likewise, the Bureau has emphasized that the School would be the sole tenant. See Final Decision & Order, In re 500 James Hance Court, L.P. & Knauer & Gorman Constr. Co., No. PWAB-8G-2006, slip op. at 18. Without more pertinent information, this facet of the arrangement is, again, of little probative impact since it may simply follow from the size of the building and the School's needs. While highlighting the significance of the School's sole tenancy, moreover, the Bureau has not accorded any weight to the fact that the premises would revert to Developer at the end of the lease period. Accord id. at 18 n. 14. 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 counterintuitive because such reversion facially supports Appellees' position that the lease is a bona fide one and not a construction contract. The Bureau and Board have supported their position, moreover, by reference to the Foundation's option to purchase the shell after five years. See id. at 14-15. In this respect, they appear to overlook that the price would not be nominal, but rather, would be based on the shell's market value at the time of purchase. See Amended Lease at § 3(b), reproduced in R.R. 516a (setting the option price as the appraised value of the property minus the cost that the Foundation incurred in constructing the fit-out). Thus, even if the Foundation exercises its option, its lease payments will have already nearly paid for the cost of constructing the shell, including financing costs, and the sum of its lease payments and the purchase price will be nearly twice the construction costs. It is therefore difficult to argue that the five-year purchase option supports the concept that the underlying arrangement is really a contract for construction, and that the Foundation was merely trying to save money by avoiding the need to pay prevailing wages on the shell. See generally In re Buehne Farms, Inc., 321 B.R. 239, 245 (Bankr. S.D.Ill.2005) ([I]f only a fool would fail to exercise the option, the option price is considered nominal and the transaction revealed to be a disguised sale.). [27] The Bureau and the Board additionally have failed to account sufficiently for various other aspects of the lease that seem inconsistent with its being a disguised build-to-suit contract. For example, once the fit-out is complete, the Foundation is not permitted to make any further alterations to the premises without the prior written consent of Developer. See Amended Lease at § 15, reproduced in R.R. 521a. Additionally, the Foundation must allow Developer to make routine, periodic inspections of the premises during business hours and during any emergency. See id. at § 25(d), reproduced in R.R. 525a. Finally, the Board's reasoning failed to give effect to the ordinary proposition in civil litigation that at some point a party bearing the burden of proof will have adduced sufficient evidence such that, in the absence of something else from the opposing party, he should prevail. See supra note 25. Long ago, this Court adopted the following perspective on the point: In every lawsuit, somebody must go on with it; the plaintiff is the first to begin, and if he does nothing he fails. If he makes a prima facie case, and nothing is done by the other side to answer it, the defendant fails. The test, therefore, as to the burden of proof is simply to consider which party would be successful if no evidence at all was given, or if no more evidence was given than is given at this particular point of the case; because it is obvious that during the controversy in the litigation there are points at which the onus of proof shifts, and at which the tribunal must say, if the case stopped there, that it must be decided a particular way.... Now that being so, the question as to onus of proof is only a rule for deciding on whom the obligation rests of going further, if he wishes to win. Henes, 317 Pa. at 310-11, 176 A. 503, 506 (1935); accord 31A C.J.S. Evidence § 199 (When the party bearing the burden of proof establishes a prima facie case, the adversary has the burden of going forward, that is, offering evidence to contradict the prima facie case[.]); cf. Cannon v. Cannon, 384 Md. 537, 865 A.2d 563, 573 (2005) (reciting that, when a party seeking to enforce a contract generates a prima facie case that the contract is valid, the defending partythe one seeking to invalidate the contractbears the burden of production as to the defenses of fraud, duress, coercion, mistake, undue influence, or incompetence). The approach is grounded in elemental logic and fairness. Indeed, rarely, if ever, does our legal system impose a burden upon one party to parry a potentially limitless series of accusations of wrongdoing by repeatedly proving the negative. Rather, as explained above, when one party makes out a prima facie case in its favor (as Appellees did here by proffering the lease), it is generally incumbent upon the opposing party to undermine that case in some way. [28]