Public Works Requirements for Tenant Improvements on Agency-Owned Property

Tenant improvements on agency-owned property can be a gray area for local governments managing lease or rent agreements. When an agency has this type of agreement and a tenant improvement is on the horizon, a version of the question from our local government customers I’ve seen here at MRSC is:

Would the agency’s public works requirements like competitive bidding and prevailing wages apply to the tenant improvement?

This question comes up consistently because an improvement to an agency-owned property meets the definition of a "public work" as defined in RCW 39.04.010(5) when the improvement is "executed at the cost of the state or of any municipality." In this same section of the RCW, prevailing wage requirements in chapter 39.12 RCW are also noted because: All public works, including maintenance when performed by contract shall comply with chapter 39.12 RCW.

With these public works requirements in mind, the answer to the question can depend on whether it’s the agency or the tenant that has a cost for the tenant improvement.

Let’s look at two scenarios that address this question.

Scenario 1: Tenant Improvement to Agency-Owned Property at Tenant’s Cost

A port district has a tenant that would like to renew their lease and also make improvements to the property. The lease agreement will have a clause that provides the ability for the tenant to make improvements at the tenant's cost, with no credit or reductions to the lease payment.

Public works requirements like competitive bidding and prevailing wages likely do not apply. If the improvements would be at the tenant’s cost, MRSC consistently advises that if the tenant improvement is in no way reimbursed by the agency and no concessions to the rent or lease are given as a result, then public works requirements are likely not required.

Also, I think the advice from MRSC in scenarios like this aligns with guidance in our City Bidding Book (pages 18-19) and County Bidding Book (pages 12-13) in the sections on Bidding Laws and Private Party Projects.

Scenario 2: Tenant Improvement to Agency-Owned Property at Agency’s Cost

A city owns property in need of improvements and intends to lease the property to a business tenant. As part of the lease agreement, the business tenant will make improvements at their expense, in exchange for a reduction in lease payments to the city.

In this situation, public works requirements like competitive bidding and prevailing wages likely do apply. There would be a cost to the city for the repairs, by forgoing of a portion of the lease payment that would otherwise be paid to the city and reimbursing the tenant for the cost of repairs with this reduction of the lease payment. MRSC has consistently advised in scenarios like this that the improvements could be considered work then "executed at the cost of the state or of any municipality," making it a public work under RCW 39.04.010(5).

For reference, these Department of Labor & Industries (L&I) Prevailing Wage determinations provide examples:

• Metropolitan Tract Determination (2017)
• Port Of Seattle Laborers Determination (2015)

Conclusion

When an agency has a lease or rental agreement with a tenant for an agency-owned facility, a tenant can be allowed to make an improvement to an agency facility at their (tenant) cost. If an improvement is made at the tenant’s cost or expense, the tenant improvement is in no way reimbursed by the agency, and no credit or reduction to the rent or lease is given because of the improvement, then public works requirements likely do not apply.

However, when an agency has a lease or rental agreement with a tenant for an agency-owned facility and the agency provides funding to the tenant for the improvement, or provides a rent or lease credit related to a tenant improvement, this could be considered work "executed at the cost of the state or of any municipality," making it a public work under RCW 39.04.010(5), which means public works requirements likely do apply.

For an "official" opinion on applicable prevailing wages requirements related to a specific tenant improvement to your agency-owned property, contact the Department of Labor & Industries (L&I) Prevailing Wage Team at PW1@lni.wa.gov or 360-902-5335 for fact-specific guidance.