Developers Beware: Development Impact Fee Deferrals Can Trigger Prevailing Wages

While painful enough in good times, development impact fees can kill a project in a tough economic market. The difficulty posed by these fees is further compounded by the fact that developers must typically pay the fees at building permit issuance – long before a project generates any revenue. In an effort to stimulate development and the revenue it creates for local government, some California communities are temporarily easing the burden imposed by these fees.

The means by which local jurisdictions provide the fee waivers or deferrals vary. For example, some jurisdictions have simply reduced the amount of the fees. Other agencies have agreed to ease the up-front costs by deferring payment to a later point such as issuance of a certificate of occupancy, sale of the improvements constructed, or a stated period of time. Still others have chosen to decide on a case by case basis whether to grant a deferral of the development impact fees.

Unfortunately, despite the good intentions, the case by case approach to fee waivers may trigger prevailing wages. Effective January 1, 2002, the definition of a “public work” was expanded to include any otherwise private project that is “paid for in whole or in part out of public funds.” That term is a key determinant of prevailing wage applicability under the California Labor Code and is defined broadly to include:

“(4) Fees, costs, rents, insurance or bond premiums, loans, interest rates, or other obligations that would normally be required in the execution of the contract, that are paid, reduced, charged at less than fair market value, waived, or forgiven by the state or political subdivision.

“(5) Money loaned by the state or political subdivision that is to be repaid on a contingent basis.”

Under the above definition, fee deferral program is critical as it can turn a private project into a public work subject to prevailing wage requirements. As a result, a project would experience potentially significant increased labor and reporting costs that would likely far outweigh any benefit of the fee deferral. Further, those caught unaware could subject themselves to fines, penalties and expensive litigation.

The acceptance of a fee deferral or waiver, however, may not cause the project to be deemed a “public work” under certain limited circumstances, including:

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

• The development is a residential project exempted from prevailing wage requirements by the Labor Code or by Government Code Section 66007 (effective January 1, 2009),

• The public funds reimburse the developer for costs that normally would be borne by the public, or

• The public funds are de minimis in the context of the project.