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Mixed-Use Developments:
Lessons Learned From Recent Deals Navigating Zoning, Financing, Community Buy-In, and Other Challenges
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WEDNESDAY, NOVEMBER 7, 2012
Presenting a live 90-minute webinar with interactive Q&A
Nancy Scull, Partner, McKenna Long, San Diego
Doris Goldstein, Doris S Goldstein, Jacksonville, Fla.
Robert Diamond, Partner, Reed Smith, Falls Church, Va.
Tim Bates, Partner, Robinson & Cole, New London, Conn.
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What is a mixed-use development?
Horizontal: Reston Town Center, Virginia
Columbia, Maryland
Vertical: Water Tower Place, Chicago
Time Warner Center, New York
Olympic Tower, New York
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Structuring the mixed-use
development
Simplicity
Flexibility
Meet developer’s objectives
Provide a forum for communicating among
uses
7
What are the available structures?
Strong master and weak subassociations
Strong subassociations and weak master
Type of Associations:
1. Condominium – used to divide ownership of portions of land without subdivision; only option if no air rights subdivision. Benefit of statutory basis but also limited by statute.
2. Cooperative – traditional corporate form where cooperative owns the real estate, the owners own stock or are members and the relationship between the two is based on landlord-tenant concepts.
3. Homeowners Association or Planned Community – (usually a nonstock or not-for-profit corporation). No statute required, but may have one. Owner owns the lot, association owns common area; based on common law, covenants running with the land and contract law.
4. Limited liability company – newer concept for master association. Very efficient and useful for master associations. Few statutory limitations; tax pass-through.
8
Ballston Metro Center
half leasehold over Metro station; half fee simple
hotel, retail mall, parking garage and residential condominium
Components
The “box” –
who owns
who uses
who fixes
who pays
O = office
C = residential condo
H = hotel
R = retail
P = parking
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Leisure World of Virginia
holes in the donut
limited liability company
Governance structure –
Each subassociation and each owner NOT in a
subassociation is a member. Individual
homeowners are NOT members. Five
condominiums plus the developer. Developer has
voting control until the project is completed.
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mckennalong.com mckennalong.com 802753063.3
Implementing the Principals for Mixed Use Vertical
Projects and Mixed Use Town Centers
Presenter:
Nancy Scull – Partner, McKenna Long & Aldridge, LLP
619.699.2457
20 802753063.3
• Odd Couple – Residential and Commercial in one building
1. Divergent Interests: Mixed Marriage of Residential and Commercial – and not necessarily compatible!
2. Commercial Owners – One Goal
- Minimize Contact with Residential
3. Residents – Two Goals
- Protect and maximize my largest investment
- 24/7 enjoyment and use
Challenges of a Mixed-Use Project
21 802753063.3
• Major structural components and building systems in one building
• Maintenance obligations for key building elements cannot be segregated
• Building must be insured and rebuilt as one work of improvement
• Control – Who should control the operation and maintenance of the Project?
• Damage by one person can have a major effect on the entire project
• Liability when things go wrong – Dysfunctional Operations and Monetary Liabilities
• Regulatory Requirements
Other Challenges of Mixed Use Projects:
22 802753063.3
• Commercial Owners: Want control but Developer must protect residential interests
• CC&Rs and Budgets are critical
• Failure to think through governance, easements, allocation of expenses, insurance, damage and destruction can result in long-term project problems
• Separate utilities – a must!
• Keep it simple – Don't create a battleship to transport a tea cup
• Limit assessment groupings
• Clear definitions
Basic Premises of Every Mixed-Use
Project
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Example of Vertical Mixed Use:
Pacific Station
Retail Condos (Whole Foods and Restaurants)
Office Condos
Residential Condos
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• Common Area is a cloud above
• All the project except the Units were conveyed to the Master Association
Pacific Station: Ownership
• Advantages to conveying all the Property to the Master Association
25 802753063.3
Master Association
Residential
Association
Commercial
Association
Owners Owners Owners Owners
Pacific Station: How Did We Govern the
Project?
• Master Association
• Members – Commercial Association (not individual Condominium Owners)
• Residential Association (not individual Condominium Owners)
• Master Board – 2 Commercial Representatives – gives Commercial Control
26 802753063.3
• The Tenant Mix – How it helped the Economics
• Challenges of Leasing in a Mixed-Use Building
• Goals of Whole Foods/Restaurant Users
• Aligning the CC&Rs and the Leases
• Allocating Assessments with
Tenant Caps
Challenges at Pacific Station: Commercial
Tenant Issues in Vertical Mixed Use
27 802753063.3
Governance and ownership at L.A. Live: Two Hotels
and more than 200 Residential Condominiums
Example of High Rise Vertical Mixed Use:
L.A. Live
28 802753063.3
Vertical Parcels Helped to Subdivide the
Project
1. Vertical Parcel Maps create
building blocks
2. Can be very complex
3. Longer to process / harder to
change
4. Allows greater flexibility to
convey areas within a “city
block.”
Roof
Condos
Hotel
Parking
Vertical Parcel Map
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Vertical Parcels Can Be Complex
30 802753063.3
Other option at L.A. Live:
Subdivide by Condominiums
Condominiums
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• Can be an undivided interest in all the building except the Units
Common Area:
Common Area is the building
except the Units or Separate
Interests
OR
32 802753063.3
• Common Area can be a cloud above
• All the project except the Units can be conveyed to the Association
Cloud Condos:
Common Area
Is a cloud or clouds
Association owns
the structure
Commercial common
area cloud
Residential common
area cloud
33 802753063.3
Pros of Vertical Maps
• Creates greatest separation between retail and commercial
• If retail is a major component – could be easier to finance
• You can use a Master Association which can help to insulate the developer from liability
• Affords greater protection to condo owners under Civil Code
Cons
• Lengthier processing through the city
• Creates two levels of associations – greater costs
• Reduces flexibility to change boundaries
• Complex documentation
Pros and Cons of Vertical Maps vs.
Modules / Condominiums
Pros of Modules / Condominiums
• Flexibility
• Processing of a Map with a city or county
Cons
• Retail and Residential may be under governance of one Association or there may be an REA
• Residential may have greater control unless you use an REA or Mutual Benefit Agreement
34 802753063.3
Alternative 2: Shared Use & Maintenance Agreement (“SUMA”)
L.A. Live Governance Alternative
Which We Did Not Use
REA or Mutual
Benefit
Agreement
Residential Condominiums
and a Residential
Association
Parcel 1
Parcel 2
Commercial Owner or
Commercial Association
35 802753063.3
• More bifurcation of the Building from a legal perspective
• Commercial Owner/Commercial Association may control most of the building components, insurance and budget
BUT
• Reciprocal easements and lien rights requires an association in California
• Owners do not owe a fiduciary duty under a SUMA
Why We Did Not Use a SUMA
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Residential, retail, commercial existing side-by-side
Mixed Use Urban Town Centers: Trends to
Create Communities
37 802753063.3
Communities Want Town Centers
• Walkable environment
• Integrated open-air, multi-use development in an energized
public realm
• Anchored by retail/dining/leisure uses with vertical and/or
horizontal residential and office and hospitality
• Becomes the “heart” of a community
38 802753063.3
Civita – New Urban Town Center in San Diego 4,000 Residencies/900,000 square feet of retail/office/civic/hospitality
39 802753063.3
Governance at Civita
• One _____ Association
• Subassociation for Mixed Use and Residential
Residential Association
Master
Association
Mixed Use
Association
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One Paseo: Use of Associations and SUMA's
High-rise, Mixed Use
Retail and Residential
Commercial/Residential
Mixed Use Retail
High-rise, Mixed Use
Retail and Residential
Mixed Use
Residential/ Retail
41 802753063.3
• Balance the residential owner control
– Control by a Master Association or Maintenance Corporation:
The Focal Point
– Control to Developer and Major Commercial/Retail
– Create “Assessment Unit/Areas”
– Educate regulatory agencies
– Provide for ability to make changes
– Ensure open and effective communication system
– Create a defined social infrastructure
Governance Objectives in a Horizontal
Mixed-Use Project
42 802753063.3
• Flexibility for document to evolve over decades of
development
• Provide a flexible governance and maintenance structure
• Flexibility to change Allocable Shares of Assessments
• Long-Term Master Developer Control
Challenges of the Horizontal Mixed-Use
Project
STRAFFORD
PUBLICATIONS
Mixed-Use Developments: Lessons Learned
from Recent Deals -- Permitting
October 31, 2012
Timothy D. Bates, Partner, Robinson & Cole LLP,
New London, Connecticut
860-437-5021
What Are You Trying to Achieve?
Mixed-Use: A combination of uses
in one integrated development
project. The most commonly
integrated uses are residential,
commercial, and office. The
integration may occur horizontally,
with different uses in different
buildings on the same street, or
vertically, commonly with office or
retail uses on the ground floors and
residential spaces in the upper
floors.
44
What Are You Trying to Achieve?
Form-Based Zoning: Emanating
from the city planning concepts of
New Urbanism, form-based zoning,
while allocating certain areas for
certain uses or mix of uses,
emphasizes the creation of walkable
neighborhoods, seeking to place
necessary goods and services within a
five- to ten-minute walk of
residences.
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The Permitting Problem.
“ . . . One cannot easily build Charleston (SC)
anymore, because it is against the law.” Andres
Duany, co-founder of the Congress for New
Urbanism.
46
Current Permitting Codes are the
Problem.
• Classic Euclidean zoning
codes require separation
of units.
• Town road standards
require out-of-scale, wider
roads to accommodate
snowplows, fire trucks,
and moving vans – no
room for pathways or
bikeways.
47
The Result.
• Sprawl based on strict separation of uses:
residential subdivisions, commercial site plans,
and industrial parks.
• An auto-based society.
48
Other Problems.
• The general public
hates sprawl, but it
is frightened by
density.
• Financing complex
new urbanist
projects can be
complicated and
difficult.
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New Urbanist Objectives.
The neighborhood has
a center and an edge,
with public parks or
structures in the
middle and
streetscapes radiating
out to the edge in
decreasing densities.
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New Urbanist Objectives.
The optimal size of a
defined neighborhood is a
quarter of a mile from
edge to edge, allowing a 5-
minute walk from home to
stores, schools, parks, and
transit stops – the gallon of
milk, gas, paint, and
alcohol.
51
New Urbanist Objectives.
The neighborhood
has a balance of
activities, from
single-family
dwellings to
commercial to
light industrial –
live, work, play.
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New Urbanist Objectives.
Street design is appropriate for the uses on the street – smaller streets
with sidewalks and principally residential areas and a limited number
of through streets. Each street has its own “transect” establishing
setbacks, height, and bulk of each building – You must “build to” not
within the defined building area to create a sense of place.
53
New Urbanist Objectives.
• Public spaces and
buildings shall be
placed in central areas.
• For retail, no setbacks,
often zero lot lines.
• Off-street parking in
rear of commercial
buildings and in back
alleys of residential
buildings. No more
snoot houses.
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Examples.
• Kentlands in Gaithersburg, Maryland, Ninth
Square in New Haven, Connecticut, and Atlanta
Station in Atlanta, Georgia.
55
The Solution.
If your municipality allows or
encourages mixed-use
development, use the
regulations it gives you.
• New York City/Chicago:
vertical integration.
• Usually planned
development districts,
planned unit
developments, and special
design districts.
• Watch out for different
fire and building codes
within building depending
on uses.
56
The Solution.
If not, invent your own zoning regulations.
• Special permit: Special use allowed in certain zones –
usually commercial and denser residential zones – that
provides higher densities, the ability to mix use, and an
integrated street, sidewalk, park layout based on an overall
plan. Appropriate for smaller developments.
• Overlay zone or special design districts: allowed in areas of
municipalities where new growth is encouraged. Provides
an alternative on top of standard Euclidean zoning.
Explicitly permits a mix of uses and creation of new
urbanist communities.
57
The Solution.
Village zoning: Applies to a defined area of town with established
character and densities and seeks to build on those characteristics.
All proposals for new construction and changes in exterior
appearance are subject to review by a special village commission.
• Close review of proposed streets to make sure they are in scale
with the existing network.
• Open spaces are to reinforce open space patterns of the district.
• Locally significant features of the area, buildings, sight lines, and
vistas are to be integrated into the design.
• Close regulation of exterior signs, site lighting, etc., to support a
coherent theme.
• Attention to scale: proportion, massing, detailing. Best for
preserving and developing already established, perhaps pre-
zoning, communities.
58
New Urbanist Zoning Regulations.
• Requires intense study
of a town or area
zoned.
– Incorporates “build
to” requirements,
special street design,
mandated building
placement, frontage
types, building
heights, and locations
for civic spaces.
59
New Urbanist Zoning Regulations.
• Shared parking is
mandated, and parking
locations specifically
prescribed and, if
possible, hidden.
• Street size, road speeds,
and parking spaces are
clearly delineated.
• Adopted in Hamden,
CT, for two major
arteries – Dixwell
Avenue and Whitney
Avenue.
60
Specific Challenges.
• Roadways: Well-designed
mixed-use communities often call
for roadways which do not meet
town or state standards. Are
those standards waivable? If
not, perhaps your development
has to be private and has to, by
itself, maintain the roadways.
61
Specific Challenges.
• Open spaces have to be thought
out and financed. How are they
maintained? Who pays for them?
Who has access to them?
• Densities are likely to be higher in
mixed-use, new urbanist
communities than in other parts
of your town. This can be a
challenge to the planning and
zoning commissions in permitting.
Densities are particularly high in
transit-oriented development.
• Fire and building codes may be
different for first floor retail than
upstairs residential, and retail
may need to be phased in.
62
Specific Challenges.
As noted, financing
different aspects of the
mixed-use plan can be
challenging.
Development may
need to be staged, and
the interests of the
town and the
developer may be
different in terms of
sequencing.
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Special Concerns for Mixed-Use
Development.
Don’t forget about
wetlands.
Developable area has
to be defined, while
protecting wetlands,
before you create a
master plan.
64
Special Concerns for Mixed-Use
Development.
Have a good traffic
study. Showing how
your new roads can
handle residential and
commercial traffic,
given their dimensions,
can be challenging.
65
Special Concerns for Mixed-Use
Development.
Perform a parking
study. Try to justify
shared parking
wherever possible in
order to allow denser
developments. Hide
infrastructure, but
provide enough of it.
66
Special Concerns for Mixed-Use
Development.
Consider charettes as a way of securing community
buy-in to the development process and the ultimate
product.
67
Mixed use is about symbiotic relationships.
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Interaction is part of the design.
Balance of power is part of the legal strategy.
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Understand the end game.
Know what to spin off, what to keep.
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Manage homeowner expectations.
72
Be consistent.
Always know what hat you’re wearing.
73
Never underestimate homeowners’ ability to
misunderstand the deal.
They just don’t get it, do they?
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You need really, really clear documents. Plain English helps
but it’s not enough.
Consider recording an executive summary ahead of the documents.
75
You’re in it for the long haul.
76
The longer you’re in...
…the greater the chance for conflict.
77
Formulas are important, but you can’t anticipate everything.
Documents need to have principles, guidelines and ways to resolve
disputes.
78
You need lines of communication…
…even when the documents disenfranchise.
79
When necessary, mediate…
…even when the legal claim is totally bogus.
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