The Related Santa Clara development is subject to public works prevailing wage laws, the California Department of Industrial Relations (DIR) ruled this week. The ruling comes in a two-year-old case brought by the International Union Of Painters And Allied Trades (IUPAT), District Council 16.
The union’s complaint drew attention last fall, when a March 2022 letter from Mayor Lisa Gillmor to Governor Gavin Newsom became public. In the letter, Gillmor argued Related Santa Clara does not meet the criteria to be considered a public works project and should be exempt from prevailing wage laws.
Although Related Santa Clara is a privately owned project, the DIR’s decision is based on the interpretation of prevailing wage law in a 2011 court case* that “a payment of public funds can occur when a public entity either reduces rent or charges rent at less than fair market value.
In the 24-page ruling, DIR Director Katrina Hagen found that the terms of the project’s many complex contracts resulted in substantial rent reduction, charging less than fair market value for the City’s 240 acres and an out-and-out public subsidy of a new electric substation.
The DIR concluded that rent “adjustments” over the terms of the 99-year lease constituted rent reductions. These include: “artificial caps” on fair market value used in rent calculations; “premium cost” deductions, a 6.5% lease increase rate without explanation of how that rate reflects fair market value; and the absence of any appraisal by an “independent and certified appraiser.”
The City even appeared to acknowledge this, according to the report.
“The city acknowledges in its June 27, 2014 agenda report that it would ‘take on some of the responsibility’ [of Related’s … infrastructure costs] through a reduction rent in the earlier years of the lease,” read the report.
Reduced fees also contribute to the “public subsidy.”
“The DA [development agreement] contemplates the ‘freezing’ of development fees for seven years after the approval of the first DAP [development fee vested period],” Hagen wrote.
Because the first DAP was approved on March 24, 2020, development fees won’t be charged at normal rates until 2027. Fees that are frozen include the dwelling unit tax and traffic impact fees.
The City also built a new substation to support Related Santa Clara. Related argued that given the project costs of $8 billion dollars, an $8 million substation is insignificant – “de minimus.” The DIR’s analysis disagreed.
“An infusion of millions of dollars to subsidize a project, even if the project brings numerous benefits the city,” wrote Hagen, “is unlikely to be ‘proportionally small enough in relation to the overall cost of the project, such that availability of the subsidy does not significantly affect the economic viability’ of the project.”
“They [the DIR] did it very good job of interpreting the law,” said Robert Williams, Business Manager and Secretary-Treasurer IUPAT District Council 16. “The city, county and Related can be great partners. We acknowledge now that it is a prevailing wage job and will provide more opportunities for apprentices to be able work and have a secure economic future.”
The ruling becomes final in 60 to 90 days. Related and the City can appeal the decision by the DIR, and, “if evidence is brought forth a differs from the facts… presented,” including “proof that rent is being charged at fair market value, a different determination might be made with respect to public works coverage.”
About the Related Project
In 2013, the City Council approved an exclusive negotiating agreement with Related to develop the 240 acres that was the Santa Clara golf course. Between 2013 and 2016, the City signed several contracts with Related for the development.
Since then, there has yet to be any actual development on the property, although phase 1 was anticipated to open in 2018. As the contract stipulates, Related starts paying rent when construction starts. The city has received no ground rent to date.
*Hensel Phelps Construction Co. v. San Diego Unified Port District (2011)