A single loan covenant flipped this 20-year lease into something else entirely
A Pennsylvania Supreme Court ruling has reshaped how build-to-suit deals with government tenants get classified – and lender covenants are right at the center.
On May 19, 2026, the court decided that a 20-year lease between developer PSP NE, LLC and the Pennsylvania State Police for a new headquarters, barracks and training facility in northeast Pennsylvania counts as public work under the state's Prevailing Wage Act. The Commonwealth Court had ruled the other way. The Supreme Court reversed it.
The deal structure is what gave it away.
The State Police produced a 128-page document spelling out what it wanted built. PSP NE signed a lease running 20 years, with two five-year extension options. Total project cost was $17,158,680. The developer borrowed $15,615,940 from First National Community Bank to fund construction, the land purchase and closing costs. The loan agreement required rent from the State Police to be high enough to cover the developer's debt service, taxes and insurance. The developer also had to collaterally assign its rights under the lease to the bank.
If the State Police canceled the lease after 10 years – the earliest allowed under normal conditions – it had to pay three months' rent and reimburse the developer for unamortized renovation costs.
PSP NE argued it carried all the risk and that rent was just rent. The Commonwealth Court agreed, leaning on the developer's reversionary interest in the property and the absence of direct government funding for construction.
The Supreme Court read the economics differently.
Justice McCaffery, writing for the majority, walked through the financing and concluded that public funds had effectively paid for construction, at least in part. The opinion applied a totality-of-the-circumstances test, drawing in factors from the federal Phoenix Field Office case that the court had previously declined to adopt: how long the lease runs, how involved the government was in design, whether anyone else could use the building, how much of the construction cost rent payments cover, and whether the lease structure exists to dodge prevailing wage rules.
On the court's reading, every factor pointed the same way. The lease ran four times longer than the one in the earlier Hance case. The State Police was the sole intended tenant. The building was constructed to detailed government specifications. The developer had no independent plan to build the facility. And the loan's requirement that rent cover debt service meant public funds were effectively a pre-condition of the construction financing.
The court also rejected the Commonwealth Court's heavy reliance on the developer's reversionary interest. Ownership of the resulting building, on the court's view, was just one circumstance among many, not the deciding factor under the Prevailing Wage Act.
On risk, the court found the developer had not actually carried it all. The State Police's potential liability for unamortized costs on early termination was, on the court's view, a payment tied to construction rather than use and occupancy.
The doctrinal shift matters. Pennsylvania's prior Hance ruling had made risk allocation a prominent consideration when assessing pre-development leases. After PSP NE, risk allocation is one factor among many. Developers can no longer assume that absorbing the construction loan and holding a reversionary interest will be enough to keep a build-to-suit project out of public-work territory.
For mortgage and real estate finance professionals, the practical signal cuts straight through the deal stack. Loan covenants that tie rent to debt service – one of the most common features of any build-to-suit financing – now read as evidence that the lease is in fact a construction contract in disguise when the tenant is a public body. The same goes for long lease terms and single-tenant designs built to government specs.
The ruling is final. The Commonwealth Court's order has been reversed.
