Could a Washington hospital district avoid prevailing wages by leasing land to a builder and leasing the project back?

Plain-English summary

In 1988, a Washington senator asked whether a public hospital district could avoid prevailing wages by leasing district land to a private builder and then leasing back a facility built for district use. The Attorney General said a public project remained a public work under the prevailing-wage statute even when the district used that indirect construction arrangement.

The AG distinguished buildings constructed for private purposes. It said mixed public and private projects, including projects where a district leased back only part of a building or held a reversionary interest, required a case-specific analysis of primary purpose and other facts. Ownership of public land alone did not settle the answer.

“Projects constructed partly for public and partly for private purposes must be analyzed on a case-by-case basis.” (Official opinion)

Currency note

This opinion was issued in 1988. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: Did a hospital district's leaseback arrangement avoid prevailing wages for a public project?
A: No. The AG said construction for district public purposes remained a public work even if a private lessee built the facility.

Q: Did every privately built structure on hospital district land count as public work?
A: No. The opinion distinguished private-purpose construction and said mixed-use projects depended on the particular facts.

Q: What if the district leased back only part of the completed building?
A: The AG declined a categorical answer. The extent of district use, primary purpose, and other details would determine whether the project was public work.

Background and statutory framework

RCW 39.12.020 then required prevailing wages on public works of state and local governments. RCW 39.04.010 supplied the public-work definition. The opinion treated hospital districts as municipal corporations and looked through a leaseback structure to the purpose of the resulting construction.

Citations and references

RCW 39.12.020; RCW 39.04.010.

Source

• Landing page: https://www.atg.wa.gov/ago-opinions/prevailing-wage-law

Original opinion text

Attorney General Ken Eikenberry

PUBLIC WORKS--HOSPITAL DISTRICTS--PREVAILING WAGE LAW

1. If a public hospital district constructs a district project through the device of leasing public hospital district property to a private property and leasing back some or all of it for hospital district use, the project is a public work for purposes of chapter 39.12 RCW, the prevailing wage law.

   2. If a public hospital district leases district property to a private party, with buildings or other structures to be constructed and used partly for public and partly for private purposes, or if the public hospital district as lessor has a significant reversionary interest in a building to be constructed by the lessee, the project may or may not be a public work for purposes of the prevailing wage law, depending on the primary purpose of the project and the other facts bearing on a specific case.

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September 20, 1988

The HonorableRick S. Bender
State Senator, 44th District

John A. Cherberg Bldg. 402-A

Olympia, WA 98504

Cite as: AGO 1988 No. 17

Dear Senator Bender:

By letter previously acknowledged you have requested a formal opinion from this office on the following question:

Does any provision of state law allow public hospital districts to construct public projects on public property under a ground lease and facility lease-back arrangement and not pay the prevailing wage rate (chapter 39.12 RCW) on the construction project?

We answer your question in the negative for the reasons discussed in the analysis below.

ANALYSIS

Public hospital districts are municipal corporations organized pursuant to chapter 70.44 RCW. They have a broad authority to acquire land and construct buildings to use for hospital and other statutory hospital district purposes. RCW 70.44.060. Hospital districts are required to execute contracts and call for bids for "[a]ll materials purchased and work ordered, the estimated cost of which is in excess of five thousand dollars . . . ." RCW 70.44.140.

RCW 39.12.020 provides in part that "[t]he hourly wages to be paid to laborers, workmen or mechanics, upon all public works . . . of the state or any county,municipality or political subdivision created by its laws, shall not be less than the prevailing rate of wage for an hour's work in the same trade or occupation in the locality within the state where such labor is performed." RCW 39.04.010 defines "public work" and provides in part that "[a]ll public works . . . shall comply with . . . RCW 39.12.020."

Hospital districts are municipal corporations. RCW 70.44.010. Thus, it is obvious that public hospital district construction contracts generally are covered by chapter 39.12 RCW. We previously have found other types of municipal corporations, such as public housing authorities, AGO 1983 No. 2, and public port districts, AGO 1978 No. 14, to be municipalities or political subdivisions for purposes of chapter 39.12 RCW. The State Supreme Court concurred with our views as to public housing authorities inDrake v. Molvik & Olsen Elec., Inc., 107 Wn.2d 26, 726 P.2d 1238 (1986). InDrake, a public housing authority, though admitting it was a municipal corporation organized under Washington law, contended chapter 39.12 RCW did not apply to its projects paid for entirely by federal funds. The court rejected the argument, holding that the state prevailing wage law applied irrespective of the source of funding.

In light of the unanimity of authority on the subject, chapter 39.12 RCW undoubtedly applies fully to hospital district contracts that are "public works" as defined in RCW 39.04.010.

Your question asks specifically about "public projects" constructed by public hospital districts under lease/lease-back arrangements. You have not fully explained what a lease/lease-back arrangement means. However, we assume that would occur when a public hospital district leases real property belonging to the district to a private party under an arrangement whereby the private party will construct a building on the land and lease it back to the hospital district to be used for district purposes. Because your question is specifically limited to "public projects," the net effect of this arrangement is for the district to construct a public works project indirectly--that is, through the private lessee--rather than directly. Chapter 39.12 RCW provides no exception for this arrangement, and we are unaware of any basis for distinguishing between this circumstance and that which is presented where the district is the outright owner rather than the lessee of the resulting building. Indeed, it would be contrary to the policy of chapter 39.12 RCW if a state agency or municipal corporation could escape the prevailing wage requirements by so easy a device as a lease/lease-back arrangement.

Given that you have confined your question to "public projects" of public hospital districts, a negative answer to your question is therefore dictated. We are aware, of course, that not all buildings constructed on public property under lease arrangements are automatically public projects. Public entities occasionally lease public property to private parties to construct buildings or other structures with strictly private purposes, and we do not intend to imply that these projects are subject to chapter 39.12 RCW. A more difficult case is presented where a public entity leases back only a portion of the space in a privately constructed building project on public land pursuant to a lease/lease-back arrangement. The proportion of space occupied by the public entity could vary from an insignificant portion (as a few spaces in the parking lot) to practically all the premises.

Still another common arrangement is for a public entity to lease out property, with the lessee to build a structure or other improvements, the improvements to revert to the lessor's ownership at the end of the lease term. In the case of long-term leases where the useful life of the improvements will be substantially expended before they revert to the lessor, it seems unlikely that the construction of the improvements could be deemed a "public work." In the case of relatively short-term leases, especially where the improvements are constructed for the lessor's use and benefit or to the lessor's specifications as related to eventual public use of the property, a different analysis might apply. In these "mixed" factual situations, we must leave our answer somewhat qualified.

To summarize, we conclude that where a public hospital district leases property to a private party, contemplating the construction of improvements to be used by the district for public purposes, the construction project is a "public work" for purposes of the prevailing wage law. Where the improvements will be constructed for private purposes, the project is not a "public work." Projects constructed partly for public and partly for private purposes must be analyzed on a case-by-case basis.

We trust the foregoing will be of assistance to you.

Very truly yours,
KENNETH O. EIKENBERRY
Attorney General

JAMES K. PHARRIS
Sr. Assistant Attorney General

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