Risk Allocation and Economic Reality in Predevelopment Leases Under the Pennsylvania Prevailing Wage Act

1. Introduction

PSP NE, LLC v. Pennsylvania Prevailing Wage Appeals Board comes to the Supreme Court of Pennsylvania on appeal by the Bureau of Labor Law Compliance from a Commonwealth Court order reversing the Pennsylvania Prevailing Wage Appeals Board (PWAB). Although the provided text is a concurring opinion by Justice Mundy (joined by Chief Justice Todd and Justice Brobson), it offers a detailed framework for analyzing when a purported predevelopment lease (a lease executed before construction and occupancy) is, in economic reality, a disguised construction contract implicating the Pennsylvania Prevailing Wage Act (“PWA”).

The core dispute concerns whether the Commonwealth’s lease arrangement—here, involving the Pennsylvania State Police’s rent payments—means the project is a “public work” “paid for in whole or in part out of the funds of a public body” (43 P.S. § 165-2), thereby triggering prevailing wage obligations.

Justice Mundy agrees with the result reached by the Court’s majority, but writes separately to (a) defend the continuing coherence of 500 James Hance Court v. Pennsylvania Prevailing Wage Appeals Board, 33 A.3d 555 (Pa. 2011) ("Hance"), and (b) explain why, under Hance properly understood, this case still supports prevailing-wage coverage because the transaction looks less like a conventional landlord-tenant relationship and more like a build-to-suit procurement.

2. Summary of the Opinion (Justice Mundy’s Concurrence)

  • Concurs in the result: Justice Mundy would affirm the outcome that prevailing wage regulation applies (or should apply), based on the economic substance of this particular arrangement.
  • Defends Hance: He rejects the majority’s suggestion that Hance ignored “all relevant circumstances” or failed to define “facially legitimate” leases, stressing that “facial legitimacy” refers to the document’s face and that “lease” is not even used in the key statutory text.
  • Clarifies permissible “avoidance”: He cautions against treating a party’s desire to avoid PWA coverage as evidence of wrongdoing, distinguishing lawful structuring from evasive artifice.
  • Centers risk allocation: He reaffirms Hance’s key insight that allocation of ownership risk helps determine whether rent is truly rent or effectively construction financing.
  • Distinguishes this transaction from Hance: He emphasizes that this case is a full build-to-suit arrangement with extensive government specifications and some shifting of construction-risk to the public tenant (including an early-termination payment of unamortized construction costs), making it harder for the developer to claim the protections of a “bona fide” lease characterization.

3. Analysis

3.1 Precedents Cited

500 James Hance Court v. Pennsylvania Prevailing Wage Appeals Board, 33 A.3d 555 (Pa. 2011) ("Hance")

Hance is the centerpiece of the concurrence. Justice Mundy reads it as an anti-evasion decision: the Court’s task was to decide whether a purported predevelopment lease was actually “a disguised construction contract,” and to identify tools for detecting “artful drafting of contracts to evade wage regulations.” He stresses that Hance did not deny the relevance of any circumstance; rather, it looked for workable indicia of economic reality, including risk allocation and ownership characteristics, to determine whether public funds “paid for” construction.

Justice Mundy also highlights Hance’s treatment of construction phasing (shell vs. fit-out) as potentially legitimate when supported by “independent business justification,” while warning against artificial phasing used only to circumvent the statute.

Penn National Mutual Casualty Insurance Co. v. PWAB, 715 A.2d 1068 (Pa. 1998) ("Penn National I")

Justice Mundy notes Penn National I for the principle that Section 5 of the PWA does not necessarily require the entire construction project to be covered—supporting the idea that legitimate project segmentation can matter. Hance extended that reasoning to “major, commonly-appreciated construction milestones,” such as completion of a building shell. This informs how courts should evaluate attempts to split work into phases.

Gregory v. Helvering, 293 U.S. 465 (1935)

Via Hance, Justice Mundy invokes Gregory for the avoidance/evasion distinction: structuring transactions to comply with law and reduce burdens (“avoidance”) is lawful; contrived form without substance (“evasion”) is not. He uses this to critique any reasoning that treats the developer’s intent to avoid PWA coverage as circumstantial proof that rent payments are construction funding.

In re Phoenix Field Office, Bureau of Land Management, ARB Case No. 01-010, reprinted in 2001 WL 944696 (June 29, 2001) (the "Phoenix Field Office test")

Justice Mundy recounts that Hance considered the “Phoenix Field Office test” as a possible multi-factor approach for assessing “economic reality” of a lease. However, he underscores Hance’s criticism that these factors (lease length, government involvement, public/private use, recapture of construction costs, evasive drafting) are highly generalized, and that “evasive drafting” is the factor with “substantial independent significance”— but is hard to prove directly. This motivates the shift to risk-allocation as an evidentiary proxy for uncovering economic substance.

Frank Lyon Co. v. United States, 435 U.S. 561 (1978)

Justice Mundy explains Hance’s reliance on Frank Lyon Co. for the proposition that the party bearing long-term business risk “should anything go awry” is likely the real owner. He rejects the idea (attributed to the majority) that focusing on ownership “improperly shifted” away from the statutory “paid for” inquiry; in his view, ownership and risk are evidentiary pathways to determining whether nominal “rent” is in fact a mechanism by which public funds pay for construction.

Basehore v. Hampden Indus. Dev. Auth., 248 A.2d 212 (Pa. 1968)

Cited for the economic observation that projects may be “paid for” through rent payments. Justice Mundy uses this to acknowledge the fungibility of money and why predevelopment leasing can raise PWA questions, while cautioning that this does not mean every predevelopment lease equals public construction financing.

Commonwealth v. Edmunds, 586 A.2d 887 (Pa. 1991)

Cited in a definitional aside: “facial invalidity” and “outside the four corners” illustrate that “facial legitimacy” concerns what can be determined from the document itself without extrinsic evidence—supporting Justice Mundy’s response to the criticism that Hance failed to define a “facially legitimate lease.”

Burden-shifting authorities cited

Justice Mundy cites multiple decisions to show burden-shifting is common and not “novel,” including: McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973), Batson v. Kentucky, 476 U.S. 79 (1986), Nardone v. United States, 308 U.S. 338 (1939), In re Fortieth Statewide Investigating Grand Jury, 220 A.3d 558 (Pa. 2019), Gussom v. Teagle, 247 A.3d 1046 (Pa. 2021), and Borough of Perkasie v. Moulton Builders, Inc., 850 A.2d 778 (Pa. Cmwlth. 2004).

Henes v. McGovern, 176 A. 503 (Pa. 1935)

Quoted (as in Hance) for a classic explanation of shifting burdens: once one party makes a prima facie case, the “obligation rests of going further” on the other side. Justice Mundy treats this as foundational support for Hance’s evidentiary framework in PWA lease disputes.

3.2 Legal Reasoning

  1. The statutory hinge is “paid for” with public funds. The concurrence frames the decisive question as whether rent payments are “exchanged, at least in part, for the service of constructing the facility.” This aligns “economic reality” analysis with the statutory definition of “public work” requiring that the work be “paid for” out of public funds.
  2. Economic reality over labels. Justice Mundy emphasizes that accepting contract labels at face value would invite artifice. A “lease” can be drafted to look like a lease while functioning as construction financing.
  3. Risk allocation as a proxy for true ownership and financing. Because rents can always be described as eventually recouping construction costs (in a broad sense), the concurrence treats the allocation of “traditional risks of property ownership” as a key indicator of whether the developer is a genuine landlord or whether the public tenant is effectively underwriting the project.
  4. Prima facie showing and rebuttal (the Hance framework). Justice Mundy restates Hance as follows: if a developer bears ownership risks and the lease facially requires only rent, the developer establishes a prima facie case of no PWA coverage; then the Bureau must rebut with evidence of evasion (e.g., unusually rapid cost recoupment, below-market purchase options, or other economic terms inconsistent with bona fide leasing).
  5. Motivation to avoid PWA is not proof of evasion. The concurrence rejects treating “desire to avoid” PWA as evidence that rent funds construction. Drawing on Gregory v. Helvering, he treats lawful compliance-driven structuring as permissible, reserving condemnation for sham transactions.
  6. Why this case still comes out the Bureau’s way. Justice Mundy distinguishes this case from Hance:
    • It is not a shell/fit-out bifurcation; it is “a build-to-suit transaction for the entire project.”
    • The lease includes extensive tenant control and specifications (128 pages), suggesting the public body is effectively procuring a customized facility.
    • The State Police assume some construction-related risk via an early-termination obligation to pay more than $1.5 million in unamortized construction costs after 10 years.
    These features, in his view, prevent the developer from establishing the initial prima facie case of a purely private, landlord-risk-bearing lease.

3.3 Impact

Although a concurrence does not itself set binding precedent, Justice Mundy’s analysis is likely to be influential in future PWA disputes involving predevelopment leases because it:

  • Re-centers the inquiry on economic substance while providing administrable indicators (risk allocation, recoupment structure, tenant control, termination payments).
  • Protects legitimate commercial planning by distinguishing lawful regulatory “avoidance” from sham “evasion,” potentially discouraging agencies and courts from inferring illegality from motive alone.
  • Signals heightened scrutiny for build-to-suit “leases” where the public tenant’s specifications and protections effectively shift construction risk and procurement control toward the public body.
  • Reinforces the continuing relevance of Hance and the burden-shifting model as a practical way to allocate proof in fact-intensive lease disputes.

4. Complex Concepts Simplified

Predevelopment lease
A lease signed before the building exists or is ready; rent typically starts at occupancy, but the lease can influence financing and construction.
“Paid for” with public funds (PWA)
The PWA applies when the construction work is funded—directly or indirectly—by a public body. The dispute is whether “rent” is truly rent or a way to pay construction costs.
Economic reality doctrine
Courts look past labels (e.g., calling something a “lease”) to how the deal actually functions financially and operationally.
Risk allocation
Who bears the downside if costs rise, the property underperforms, the tenant leaves, or the project fails—developer or public tenant. Bearing risk often indicates true ownership.
Reversionary interest
The landlord’s right to get the property back at lease end. A meaningful reversion tends to support that the developer is a real landlord rather than a mere builder.
Burden shifting / prima facie case
If one party shows enough facts to win unless the other side responds, the obligation shifts to the other side to come forward with contrary evidence.
Avoidance vs. evasion
“Avoidance” is lawful structuring to stay outside a statute; “evasion” is sham form designed to appear compliant while accomplishing what the law forbids.

5. Conclusion

Justice Mundy’s concurrence defends Hance against the suggestion that it narrowed the inquiry into predevelopment leases and reiterates that the PWA question is ultimately about whether public funds “paid for” construction in economic substance. His central contribution is an insistence that risk allocation and ownership-like burdens are not “new concerns” but practical tools to uncover whether “rent” is actually construction financing. Applying that lens, he finds the present arrangement—marked by extensive State Police specifications, tenant control, and partial shifting of construction cost risk—sufficiently procurement-like to support prevailing wage coverage, even while cautioning against treating mere motivation to avoid PWA as evidence of evasion.