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N 4189212v.5 MIXED-USE PROJECTS: STRUCTURE, OPERATIONS & GOVERNANCE MICHAEL K. KUHN JACKSON WALKER L.L.P. 1401 McKinney, Suite 1900 Houston, Texas (713) 752-4200 (Telephone) (713) 752-4221 (Facsimile) [email protected] www.jw.com SOUTH TEXAS COLLEGE OF LAW REAL ESTATE LAW CONFERENCE JUNE 8-9, 2006

MIXED -USE PROJECTS: STRUCTURE, OPERATIONS & GOVERNANCE

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Page 1: MIXED -USE PROJECTS: STRUCTURE, OPERATIONS & GOVERNANCE

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MIXED-USE PROJECTS:

STRUCTURE, OPERATIONS & GOVERNANCE

MICHAEL K. KUHNJACKSON WALKER L.L.P.

1401 McKinney, Suite 1900Houston, Texas

(713) 752-4200 (Telephone)(713) 752-4221 (Facsimile)

[email protected]

SOUTH TEXAS COLLEGE OF LAWREAL ESTATE LAW CONFERENCE

JUNE 8-9, 2006

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Michael K. Kuhn is a partner in the Business Transactions section of Jackson Walker. He hasover 26 years of expertise in the area of commercial real estate. Mr. Kuhn is Board Certified inCommercial Real Estate Law by the Texas Board of Legal Specialization.

As a member of the firm’s Real Estate Group, Mr. Kuhn works in the areas of real estateacquisition, disposition, development, and leasing matters. His practice encompasses traditionalpurchases and sales, leases and financings involving office buildings, shopping centers,commercial and residential condominiums, and mixed-use projects, including large portfolio andmulti-state transactions. He has had significant experience in most every area of real estate law,enabling him to responsively address the clients’ needs and to create innovative solutions. Mr.Kuhn’s real estate clients range from individual investors to small- to mid-size real estateoperating companies, up to large publicly-traded REITs, and other public companies.

Mr. Kuhn serves as the Secretary/Treasurer of the Houston Bar Association’s Real Estate LawSection. Mr. Kuhn is also a member of the International Council of Shopping Centers (ICSC),College of the State Bar of Texas, and the American Bar Association.

Mr. Kuhn has been recognized as one of America’s leading lawyers for business by ChambersUSA. Mr. Kuhn was named one of “Houston’s Top Lawyers” by H Texas Magazine and a“Texas Super Lawyer” by Texas Monthly magazine.

Mr. Kuhn has authored various articles and made presentations on real estate topics at the StateBar of Texas Advanced Real Estate Law Seminar and the Mortgage Lending Institute.

Mr. Kuhn received his B.A. degree, magna cum laude, from Duke University, and his J.D.degree from the University of Virginia School of Law.

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TABLE OF CONTENTS

I. INTRODUCTION .............................. 1

II. STRUCTURING ALTERNATIVES 2

A. VARIOUS STRUCTURINGDEVICES ............................................ 2

B. STATUTES GOVERNING TEXASMIXED-USE PROJECTS ................... 3

C. HORIZONTAL MIXED-USEPROJECTS – USING COVENANTSCONDITIONS& RESTRICTIONS ............................. 4

D. VERTICAL MIXED-USE PROJECT –STRUCTURINGAS A CONDOMINIUM...................... 8

III. OPERATIONAL AND DESIGNISSUES WITHIN THE MIXED-USEPROJECT .......................................... 10

A. PARKING.......................................... 10B. ACCESS TO THE PROJECT ........... 11C. VISIBILITY ...................................... 11D. CONVENIENCE............................... 12E. CONSTRUCTION AND

RENOVATION ................................. 12F. LIGHTING CONTROLS .................. 12G. NOISE 12H. COMMON AREA MAINTENANCE

COSTISSUES .............................................. 12

I. PHASING .......................................... 13J. IMPACT ON

DOCUMENTATION ........................ 14

IV. GOVERNANCE ............................... 15

A. LAYERED OR TIEREDASSOCIATIONS............................... 15

B. CONTROL STRUCTURESAND MECHANISMS ....................... 15

C. THIRD-PARTYMANAGEMENT............................... 16

D. TURNOVER...................................... 16E. DISPUTE RESOLUTION................. 17

V. CONCLUSION................................. 17

Exhibit A .............................................. N-(i)Exhibit B ............................................. N-(ii)

BIBLIOGRAPHY ................................... N-(iii)

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MIXED-USE PROJECTS –STRUCTURE, OPERATIONS &

GOVERNANCE

I. INTRODUCTION

In response to continued urban sprawl, manycities are now encouraging more intensivedevelopment as certain portions of the urbanpopulation desire live/work/play arrangementswhere compactness is an attractive feature andclose-hand availability of shops, stores,entertainment and restaurants provide acompelling mix. As a result, many differenttypes of mixed-use projects have been created –vertical mixed-use towers, integrated multi-owner structures, suburban lifestyle centers,business parks, shopping centers with additionaluses, master-planned communities and resorts.

Mixed-use projects have several perceivedadvantages over comparable single-usedevelopments. Among these are: theopportunity to create a “sense of place” (anincreasingly common “buzz-phrase” amongmixed-use developers and the designprofessional community), ability to deliver acritical mass of bundled product, enhancedcross-marketing opportunities, economies ofscale in operation and management (such asoptimizing the use of parking structures), andcreation of a high-profile project. However,with the complexity and interdependence of thevarious components of mixed-use development,the challenges to success and the potential risksare increased over those associated with thetypical single-use project.

Mixed-use projects are characterized by three ormore different types of uses – typically retail,office, and residential, and sometimes includinghotel or entertainment – all integrated by meansof a master plan. Because of the scale andcomplexity of the typical mixed-use project,significant feasibility planning, market analysis,governmental approvals and permits, and capitalinvestment are required in order to achievesuccess. The uses contemplated in the projectmust complement each other and in turn must beseparately marketable. The integration amongthe different elements and uses must functionboth in the real world and in the legal

documentation. Timing is important in bringingthe desired uses on-line consistent with marketdemand. As a result, many mixed-use projectsare developed in phases. Phasing helps thedeveloper better gauge the market demand fordifferent product types; yet phasing adds asignificant layer of complexity to an alreadycomplex project structure.

Cities and towns have increasingly becomeinterested in mixed-use projects to addressmunicipal objectives. In some cases, themunicipal attraction or impetus for a mixed-useproject is the parking garage component – themunicipality seeks to have the developer furnisha parking facility that is shared between thetenants, occupants and customers of thedeveloper’s project as well as visitors to nearbymunicipal offices, parks or other attractions. Insuch instances, the parking structure, althoughconstructed by the mixed-use project developer,is purchased by a redevelopment agency withmunicipal bond proceeds, giving rise to specialtax considerations in the operational aspects ofthe garage. Oftentimes, balancing the tensionbetween the municipality’s parking needs andthe demands of the project components(particularly retail and multi-family) is tricky.

We will focus on the structure, organization andgovernance of mixed-use projects, bothhorizontal projects (where the various uses areside-by-side on adjoining tracts) and verticaldevelopments (where one use sits atop anotherwithin the same building structure). Inparticular, we will look at the structuringpossibilities available under Texas law. Sinceevery mixed-use project tends to take on specificcharacteristics of its locale, there is no “one sizefits all” structural or organizational method.However, general principles are applicable tomost every mixed-use development.

A mixed-use project requires imaginativerevisions to traditional document forms.Counsel should consider carefully which partiesshould enter into each document to account forissues of confidentiality and flexibility inobtaining later approvals. Since the differentuses within a mixed-use project often havecompeting interests, it is incumbent on theproject developer to reconcile those interests,

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and it is left to developer’s counsel to documentcarefully and thoroughly those reconciliations.

This article is to serve as a guide to counsel inthinking through the issues involved in creatingthe documentation for a mixed-use project.Critical thinking, careful examination oframifications, and recognition of the balancingtask involved in drafting fair and even-handedprovisions assure the success of the projectdocuments.

Since mixed-use projects themselves varywidely, template document forms generallyavailable are either over-generalized orrestrictively narrow. There are, however,several good examples of mixed-use projectdocumentation contained with the articles listedin the bibliography appearing at the end of thisarticle.

II. STRUCTURING ALTERNATIVES

A. VARIOUS STRUCTURING DEVICES

In the various states, there are several differentstructuring devices to choose from for mixed-use development:

1. Condominium – most advantageous forvertical mixed-use projects.

2. Covenants, Conditions & Restrictions(CC&Rs) and Reciprocal Easement Agreements(REAs) – for horizontal mixed-use development.

3. Air Rights Deed – Airspace Subdivision(or Three Dimensional Plat where local lawsallow).

4. Partnership interests through a masterlimited partnership.

5. Ground Lease(s).

6. “Vertical PUD” (Planned UnitDevelopment) under the Uniform CommonInterest Ownership Act in the states (notincluding Texas at present) where available.

Since mixed-use projects are, by definition, acombination of concepts, it is not uncommon to

see one or more of these structuring devicescombined in interesting and challengingarrangements in mixed-use project development.An air rights deed can be combined with acondominium to allow the creation of aresidential condominium within a fee simpleairspace. As a further example, a combinationof ground lease and condominium was used inthe formation of Albuquerque Plaza, a full-city-block mixed-use project in downtownAlbuquerque, New Mexico, containing the HyattRegency Albuquerque Hotel and Albuquerque’stallest office building. The project consists of asix-unit commercial condominium – one unit foreach type of use: office, hotel, parking garage,and three subdivided retail units – all atop agroup of 99-year ground leases. Typically, themost advantageous structuring choice is afunction of state law considerations.

In some states such as California, it is possibleto create a vertical subdivision – sometimescalled a “flying freehold” – as a means ofcreating separate ownership space above theground. Only a handful of states havesubdivision statutes that allow the creation of avertical subdivision without the use of acondominium. Texas subdivision law isconsidered by most not to permit the flexibilityof subdividing air space into a separate legal lot.Although changes to Texas law allowing verticalsubdivisions may be in the offing, today thestructure of choice for mixed-use developmentin Texas is either a condominium (or a two-tiered condominium structure) under the TexasUniform Condominium Act for vertical mixed-use development or the classic Covenants,Conditions & Restrictions (CC&Rs) or aninterlocking series of CC&Rs and reciprocaleasement agreements (REAs) for horizontalprojects. The more complex mixed-use projectsmay employ a combination of condominiumsover-laid with CC&Rs. Although otherownership methods for a Texas project aretheoretically possible (such as the use of tenantsin common, air rights conveyance, andpartnership interests through a master limitedpartnership), the two structuring devicesdescribed above are generally preferable for theorganization and governance of Texas mixed-use projects.

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B. STATUTES GOVERNING TEXASMIXED-USE PROJECTS

Counsel for the mixed-use developer mustconsider and address a number of statutes in thecreation, design and operation of a mixed-usedevelopment: Some that may be applicableinclude:

1. Texas Uniform Condominium Act,Chapter 81, Texas Property Code (“TUCA”);

2. Interstate Land Sales Full DisclosureAct, as amended, Public Law 90-448, Title XIV,15 U.S.C. §1701 et seq., Public Law 96-153;

3. Federal Fair Housing Act, 24 CFR§100.205;

4. Texas Fair Housing Act, §301.025Texas Property Code;

5. Residential Construction Liability Act,Texas Property Code §27.001 et seq., and TexasResidential Construction Commission Act,Texas Property Code §401.001 et seq.;

6. Americans with Disabilities Act (ADA),42 U.S.C. §12181 et seq. & regulations under 28CFR §36.001 et seq.;

7. Federal & State Architectural BarriersActs;

8. Local housing ordinances;

9. Local municipal development codes;

10. Separate metering of multi-familyresidential units, Texas Utilities Code §184.012and Texas Water Code §13.502;

11. Recording of a property ownersassociation’s governing documents, TexasProperty Code §202.006.

Of the statutes that may come into play in thedevelopment of a mixed-use project involving aresidential component (as most do), the morenotable ones are summarized below:

1. Interstate Land Sales Full DisclosureAct. The Interstate Land Sales Full DisclosureAct, 15 U.S.C. § 1701 et seq. (“ILSFDA”) maybe applicable to the residential component of amixed-use project. Though many developers arefamiliar with ILSFDA in connection with thesale of undeveloped lots, this federal registrationstatute is often applicable to the development oflarge scale residential condominiums, orapartment condominium conversions. If theproject will have less than one hundred units,registration is not mandated under ILSFDA. Ifthe project will contain one hundred units ormore, either the project must be registered underILSFDA or qualify under one of the severalexemptions from registration.

The most common exemption relied upon by thedevelopment community from ILSFDAregistration is the “builders exemption” providedin 15 U.S.C. § 1702(a)(2). To satisfy thisexemption, the developer must unconditionallyagree, in the sales contract for each unit, todeliver the unit to the purchaser within two yearsfrom the date the unit purchaser signs the salecontract. HUD has stated its position that eachunit of a condominium project is viewedseparately for determination as to whether theexemption is satisfied. In other words, toqualify for the exemption, the developer must besubject to a legally binding obligation to deliverthe unit completed within two years of contractsigning, and the unit purchaser must have aremedy other than mere return of the earnestmoney deposit. The exemption does allow thedeveloper to include a market feasibility periodof up to 180 days that would allow the developerto terminate the purchase contract if thedeveloper has not satisfied its pre-salerequirement or otherwise concludes not toproceed with the project. But this marketfeasibility period does not extend the two yearperiod for delivery of the completed unit.However, the ILSFDA exemption doesrecognize extension for customary “forcemajeure” events to the extent they would excusethe developer’s performance under applicablestate law.

The ILSFDA imposes harsh penalties for non-compliance. A developer whose project wouldarguable fall within the registration requirements

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of ILSFDA would do well to obtain an advisoryopinion from the Office of ConsumerRegulatory Affairs of HUD.

2. Fair Housing Act. The Fair HousingAct (“FHA”) will apply to a mixed-use projectcontaining a residential component. Generally,the Fair Housing Act prohibits discrimination inthe sale or rental of a residential dwellingagainst any person because of race, color,religion, sex, familial status, or national origin.42 U.S.C. § 3604. Case law has held that theFHA applies to residential condominiumdevelopment. The FHA and regulationspromulgated there under will impact the mannerin which the developer designs the project (e.g.,handicapped parking spaces) and markets theresidential units.

3. Texas Residential Construction LiabilityAct; Residential Construction Commission Act.For Texas mixed-use projects involving aresidential component, the ResidentialConstruction Liability Act (“RCLA”) will applyto any residential owner’s action to recoverdamages or other remedy arising from aconstruction defect. Texas Property Code,Section 27.001 et seq. As long as the developerand his contractor follow the provisions of theRCLA, compliance will effectively shield themfrom liability under the Texas Deceptive TradePractices Act. A more recent law – the TexasResidential Construction Commission Act –creates a commission to adopt standards forwarranties on residential construction andprovides a mechanism for residential owners topresent and prosecute claims against builders.Texas Property Code, Section 401.001, et seq.

C. HORIZONTAL MIXED-USEPROJECTS – USING COVENANTSCONDITIONS & RESTRICTIONS

A mixed-use project designed along horizontallines customarily consists of separate specific-use parcels oriented around a centrally-themedcommon area or focal point, with each parcelbeing sold or ground leased to the selectedspecific-use user (either a sub-developer, retaileror builder). With each particular use type beingsituated on its own tract or parcel, the projectdocumentation can be arranged through a set of

“Covenants, Conditions & Restrictions”(“CC&Rs”) or one similarly named, or forcomplex projects, a coordinated series ofCC&Rs and restrictions which may involve amaster CC&Rs document covering the entireproject and separate subsidiary CC&Rs for eachuse component. For the sake of convenience,we will refer to either of these instruments orgroup of instruments as the “CC&Rs.”

The CC&Rs are designed to bring the diverseelements of the mixed uses together into onegoverning document. The instrument (or set ofinstruments) integrates and coordinates thevarious uses, establishes easements (includingaccess, cross-parking, utilities), establishesgeneral restrictions, and typically containsdesign and construction guidelines (includingarchitectural elements, height and setbackrequirements, colors and materials, signage andlandscaping). The CC&Rs are to be executed byeach of the parcel owners, which often is theproject developer at the inception of the project.The project developer designates the intendeduse of each tract or parcel of the project bymeans of a plat or the CC&Rs.

The CC&Rs are to run with the land and is usedto bind all owners within a horizontal mixed-usedevelopment to the overall development scheme.As noted above, in complex projects, it may beuseful to use multiple CC&Rs, including amaster CC&Rs that addresses matters commonto the entire project, coupled with supplementalCC&Rs that address matters unique to one ormore uses or parcels within the project.

The CC&Rs provide the vision and generalframework for the regulation of the horizontalmixed-use development, together with standardsand procedures for the development,administration, operation and maintenance of theproject. The following are the typical matterscovered in the CC&Rs:

1. Permitted uses, including permissive,mandatory and prohibited uses;

2. Reciprocal and other easements;

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3. Entitlements relating to use andenjoyment of common areas and sharedfacilities, particularly recreational elements;

4. Maintenance responsibilities, andenforcement mechanisms for failure to maintain;

5. Alterations and future additions;

6. Architectural control standards, designguidelines, approval procedures and disputeresolution procedures specific to designrequirements;

7. Insurance requirements;

8. Casualty and condemnation provisions;

9. Access rights and controls;

10. The governance structure, typicallyincluding the designation of an ownersassociation or maintenance manager;

11. Compliance and enforcementprovisions;

12. Responsibility for assessments,including lien enforcements;

13. Operational obligations of various useswithin the project (such as “continuous open”covenants of retailers);

14. Operational budgeting, record keepingand bookkeeping requirements;

15. Developer rights for future expansion,modification of uses, or redevelopment.

Several important concepts of the CC&Rs arediscussed below:

1. Architectural Control and ConstructionProcess. Since horizontal mixed-use projects areoften developed by several property owners anddevelopers on varying time lines, designguidelines and architectural control andconstruction procedures must be well conceivedand unambiguous. The design approvalprovisions of the CC&Rs should address bothinitial construction activities and any future

rights and obligations regarding modifications oralterations. Typically, the specific design andconstruction guidelines are incorporated into theCC&Rs or are contained in a separate designguideline document. The responsibility forarchitectural review and approval is typicallydelegated to an architectural review committee(initially controlled by the project developer andthen subsequently by the major owners). Insome instances, there are two committees – onereviewing new construction and a secondoverseeing modifications. Splitting theseresponsibilities allows the project developer agreater hand in executing the overall vision forthe project in its construction phase, whileallowing the end users greater say in the “lookand feel” of the project in subsequent years asthe project matures. Counsel in charge ofdrafting the CC&Rs should strive to balance theinterests of the project developer and those ofthe subsequent owners in design control.

2. Construction Schedule. Due to theintegrated nature of mixed-use developments,strict adherence to construction time lines for allparties is a critical element of the project’ssuccess. The CC&Rs should contain or providefor the establishment of construction schedulesfor each parcel and construction milestones suchas commencement or substantial completiondates, with penalties and perhaps self-help rightsif the time line is not being achieved. Particularattention must be given for the construction ofcommon elements or shared facilities that areessential to the opening of the project, such asdriveways, walkways, pedestrian malls, andparking facilities. The CC&Rs should provideremedies to assure construction performance; forexample, the CC&Rs may require performancebonds or construction guarantees to protect otherproperty owners against construction delays ordefaults or bankruptcy. Some exceptions maybe necessary in limited circumstances, such aslabor strikes, natural disasters, and unforeseeableadverse weather conditions. However, anydelay, whether excusable or not, may have aserious impact on the other property owners andthe success of the project.

3. Use Controls. The CC&Rs typicallyimpose various permitted and prohibited uses,designed to protect each property owner in its

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rightful enjoyment of its particular use. Themost significant challenge in the interactionbetween different uses occurs between retail andresidential uses. The residential ownerstypically want controls in place to ensure thatthe retailers will not disturb the residents withnoisy operations, late-night clubs, congregatingof crowds, adult entertainment, or overburdeningof common areas or parking facilities. Retailersare typically less concerned about residentialproperty owners but may worry about residents’“poaching” on retail parking spaces orinterfering with business operations.Regulations governing uses should extend notonly to owners, but also to tenants, guests,licensees and invitees as well.

4. Common Area or Shared Facilities CostAllocation. Mixed-use projects also presentchallenges in the delineation of maintenanceobligations and the allocation of maintenancecosts for common areas and shared facilities.Maintenance of improvements owned and usedexclusively by one property owner should be thesole responsibility for that owner, even wherethe improvements are actually located on otherproperty. For shared facilities, cost allocationsbased upon usage or benefits is the mostcommon. Problems arise when either the projectdeveloper or a key tenant or user negotiates aexemption or discount from the normal costallocation arrangement. This forces theremaining owners to bear an over-allocation ofmaintenance costs for those facilities. Propercost allocation depends on many factors,including design, configuration, location,ownership, infrastructure, utilities, signage andmonuments, and specific characteristics of theproject such as the type of use, intensity of useand potential disproportionate impacts of one ormore segment of users over another. Typically,the developer divides the expenses into separatecost centers, such as buildings, parking facilities,recreational amenities, elevators, HVACsystems, landscaping, security, etc. Althoughallocation based on square footages isconvenient, oftentimes in mixed-usedevelopments this type of cost allocation leadsto unfair results since usage infrequentlycorrelates well with floor areas. A moreequitable allocation is based on the intensity of

the anticipated use by the different use groupswithin the project. Since intensity of use cannotbe known with certainty at the inception of theproject, the CC&Rs may provide for costallocation based on a reasonable estimate of useintensity for each use group as a beginningpoint, with a re-allocation procedure after aperiod of time once a use history can bedetermined.

5. Insurance. The CC&Rs should dictateminimum insurance requirements and setstandards for insurers and criteria to determinewhether an owner can self-insure. For sharedfacilities that are critical to the project’soperation, it may be appropriate to have a masterinsurance policy, with the property ownerspaying an allocated share of the premium cost,rather than attempting to allocate insurancecoverages among several owners.

6. Casualties; Rebuilding. Also critical arethe CC&Rs’ provisions concerning rebuildingfollowing casualty. Since the guiding principleof the mixed-use project is the synergy createdby the differing uses, it would be necessary torequire reconstruction of any damaged ordestroyed improvements in order to preserve theproject’s integrity. There may need to beexceptions to the mandatory rebuilding rule, butthese should be limited to avoid losing keyproject components. Moreover, where aproperty owner is required to rebuild, theCC&Rs often provide that the insuranceproceeds are to be paid directly to a trustee or amaster property owners association, rather thandirectly to the property owner. This allows thetrustee or association to disburse the proceeds instages as the reconstruction takes place, thusproviding both an incentive to reconstruct anassurance and that adequate funds for thecompletion of the repairs are available. Caremust be taken to address lender concerns in thiscontext in order that the lender may feelcomfortable entrusting proceeds to the trustee orassociation in exchange for relinquishing theright to have insurance proceeds pay down themortgage debt.

7. Easements. Typically, the CC&Rswould establish the following types ofeasements:

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(a) Access easements. Easements foraccess are needed to allow access not only toeach owner’s particular property, but also toshared facilities such as parking garages,recreational amenities, and loading docks.

(b) Structural support and encroachmenteasements. Where buildings abut one another,or constructed on a “zero lot line” basis or sharea common wall, each property owner will needeasements to attach its improvements to, andreceive structural support from, improvementson adjacent property. These easementscommonly include an easement allowingimprovements to encroach upon portions ofadjacent property or common areas to the extentnecessary, particularly during construction. Theadjacent property owner will need protections inthe easement that construction activity will be inaccordance with the rules and regulations andconducted so as not to overly burden theadjacent property.

(c) Construction and maintenanceeasements. Easements for construction andsubsequent maintenance of a property owner’simprovements or equipment are necessary topermit one property owner access throughanother property for the purpose of constructingand thereafter maintaining facilities such asutility lines and structural supports. The CC&Rsshould define the scope of these activities andprovide a level of protection to the burdenedproperty, through notice requirements andscheduled hours for construction or maintenancework (with an exception for emergencies).

(d) Utilities and equipment easements. Oneperceived benefit of mixed-use development isthe project’s ability to achieve economiesthrough strategic placement of utility facilitiesthroughout the project. Thus, the multiple usecomponents can benefit from the singleplacement of utility lines and equipment. Utilityeasements are necessary so that each benefitedparty will have access for installation,maintenance, repair and replacement of utilitiesand equipment. The burdened property ownerwill want to ensure that controls are in place togovern the type of utilities or equipmentinstalled and the hours and manner in whichinstallation or repair takes place.

8. Other Documents. The CC&Rs maynot be the only document needed for thehorizontal mixed-use project. Besides theCC&Rs, the project may require or benefit from:

� A separate, multi-party REA governing thestructured parking facility, particularly if there isa municipal corporation or communityredevelopment agency providing the financingfor the construction of the parking facility. Thisseparate instrument will contain the specificagreements regarding the parking facility, so thatthe public agency will not be a party to theCC&Rs (which might give it a voice in anysubsequent modifications).

� A tri-party maintenance and operationagreement among the retail developer, the officedeveloper, and the major retailers (only) in orderto spell out, perhaps in great detail, the use andoperational requirements that are of interest tothose parties (without the involvement of theowner(s) of the residential component of theproject).

� A development agreement among the partiesinvolved in the project’s initial construction anddevelopment, to deal separately with such issuesas scheduling and special phasing/stagingarrangements, especially where segments of theproject may open while construction on othersegments remains in progress.

9. Governance. Governance structures fora horizontal mixed-use project differ little inanalysis from that of a vertical project (which isdiscussed in greater detail below). In simplerprojects with few mixed-use components, asingle association governing the entire projectcan be made to work. Within a singleassociation, the separate uses are divided intoclasses, with each class given a weighted votingon matters consistent with such factors as landarea, building area, building value, usage rights,or some other method of allocation. For morecomplex projects, a master association ispreferable, to administer the areas within theproject common to all users, with subsidiaryassociations operating each usage type of theproject. This multiple layer approach togovernance is more fully described below.

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D. VERTICAL MIXED-USE PROJECT –STRUCTURING AS A CONDOMINIUM

The Texas condominium statute was completelyredone in 1994 with the legislature’s adoption ofthe TUCA. Although the majority of theprovisions of the Act are directed towardresidential development, the Act has sufficientflexibility to permit its use incommercial/residential mixed-use developments.An important feature of the TUCA is the abilityto subdivide units (TUCA Section 82.003(12)),thus allowing the creation of a two-tier mixed-use condominium structure where the buildingareas comprising each specific use are placed ina unit within the master condominium (e.g., aretail unit, an office unit, a residential unit) andthen certain of the units themselves arecondominiumized. As discussed below, thistwo-tiered structure aids not only projectoperations but governance as well.

The condominium structure is usually preferablefor Texas vertical mixed-use projects, for severalreasons:

(a) Statutes Well Understood. The marketplace has had over two generations to accustomitself to the nature and structure ofcondominiums. The current version of theTexas condominium law is adequate for mostmixed-use projects, including the more complexones involving numerous types of differentusages. The advantage of being able to controlthe entire development initially through oneownership device (i.e., until the individual unitsare sold) is significant from the standpoint ofproject construction/development financing.

(b) Flexible Document. Although thecreation of a Condominium Declaration (with itsattendant drawings specifying each unit) is anexpensive proposition, once in place thecondominium structure allows much moreflexible redevelopment of the project than woulda platting of a vertical subdivision. Plattingstatutes and regulations are commonly muchmore complex and the process more politicizedthan the process of amending a CondominiumDeclaration to change unit boundaries or todesignate different uses.

(c) Targeted Lenders. As real estate lendersbecome more sophisticated and specialized,lenders are more interested in underwriting andfunding loans within particular categories orsub-categories of usage. For example, multi-family lenders may find themselvesuncomfortable in evaluating a single projectwhich mixes multi-family, office, retail andhotel uses. The condominium structure allowsthe developer to compartmentalize each portionof the project by use, and thereby findpermanent financing with specialized lenders.Moreover, this structure fits will with thelending community’s current desire to have theseparate use components owned in “singlepurpose entities” or SPEs.

(d) Componentizing Value. When themulti-use project is segregated by type of usesinto separate condominium units, oftentimes thevalue of the separate parts is greater than thewhole. Each condominium unit can be looked atseparately for valuation purposes, and thenegative aspects of one particular usage (i.e., asoft multi-family market) would not necessarilyimpair the value of the other components.

(e) Market Changes. The mixed-usecondominium may afford greater futureflexibility as the market changes. For example,a hotel could be converted into for-salecondominium units, through sub-condominiumization of the hotel condominiumunit. Retail units could be converted into office,or vice versa.

(f) Exit Strategy. Structuring a mixed-useproject as a condominium affords the developerflexibility in designing favorable exit strategyscenarios. A residential unit can be developedas a single condominium unit with rental-onlyapartment units, or sub-condominiumized intoindividual units for sale. The developer canretain ownership of the units that best suits his orher expertise and sell off those componentswhich others may be more adept at operating ormanaging.

1. Tier Structuring. As noted above, theproject may employ a two-tier condominiumlegal structure to optimize the organizational

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and operational advantages. See chartattached as Exhibit A.

2. Critical Components of theCondominium Declaration.

(a) Regulation of Uses. The uses for eachcondominium unit must be carefully thoughtthrough for definition, limits and permitted uses.There is naturally tension between thecommercial and residential uses, particularlywhere the commercial uses are retail or hotel.The uses specified must contain sensible limitsand prohibitions against disruptive behaviors toallow each different use to coexist as a “goodneighbor” to the others. Furthermore,developer’s counsel must carefully check zoningordinances, recorded restrictive covenants,easements and plats to assure that the usespermitted under the Condominium Declarationare not inconsistent with pre-existingrequirements. The Condominium Declarationmust provide to each unit, particularly retailunits, a sufficiently broad permitted use to allowthe unit owner to enjoy his space or operate hisbusiness in customary fashion. Commercial unitowners (and their lenders) must have assurancesthat the Declaration’s use clauses cannot beamended without their consent. Residential unitowners will value limitations on the commercialuses in order to produce a livable environment,particularly in evenings and nights. Of course,there is a natural trade-off here, since theattractiveness of a mixed-use development maybe its late-night entertainment offerings, andoverly restrictive use requirements may hamperthe project’s success.

(b) Easements. A mixed-use condominiumproject will require numerous easements, each ofwhich must be designated by legal descriptionunder the statutory requirements. TUCASection 82.059(5). Although the TUCAprovides expressly for some easements, theremay be others necessitated or advisable giventhe nature of the specific project. The followinglist of easements is a place to start:

Access, parking, loading, construction, supportand encroachment, utilities, elevator, amenities(such as swimming pool, jogging trails, exercise

area, outdoor pavilion), signage, stairs andstairwells, garbage chutes, rooftop usage,telecommunications, common elementeasements, and easements in connection withany future development area.

Each easement must be analyzed as to whether itis exclusive or non-exclusive, and whether it isassignable apart from its benefited unit. TheCondominium Declaration must specify whichunit owner(s) is responsible for the maintenanceand repair of each easement designated. Certainrights may be more in the nature of a licensethan an easement (e.g., use of the hotel fitnesscenter and swimming pool by residential unitowners). Use rights of this latter type may bebetter governed by separate license agreementsadministered by the condominium association.

(c) Common Elements. As noted, thedesignation for common elements for a mixed-use condominium project is critical. All spacethat is not within the actual boundaries of eachunit (i.e., the four walls, floor and ceiling of eachoffice space, retail shop, or residential dwelling)constitutes “common elements”. All space thatis used by one or more but not all of thecondominium unit owners is designated “limitedcommon elements” by statute. TUCA Section82.003(17). If a common element is not alimited common element, then the statutedesignates it as a “general common element”.TUCA Section 82.003(14). Examples of limitedcommon elements include balconies and patios,storage units, and restricted-use parking areas.Individual parking spaces appurtenant to aresidential unit are typically limited commonelements. Parking surface lots and garages canbe common areas or can be included within aunit depending on the nature of usage and therelationship of unit owners and their operators.For complex projects, it may be advantageous toplace all of the general “common elements” intoa separate condominium unit, so long as thereare at least some common elements (e.g., thereal property and the building structuralcomponents) outside that unit. Creating such a“shared facilities unit” may be useful incontrolling the quality of the overall projectthrough the governance of the shared facilitiesunit by the Master Association. Limitedcommon elements can then be attributed to each

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unit as appropriate, by designating within theCondominium Declaration item such as “officelimited common elements”, “retail limitedcommon elements”, etc.

(d) Casualty and Condemnation. Texascondominium law requires its statutoryprovisions to control in connection with casualtyor condemnation affecting the condominiumproject. Section 82.111 of the TUCA, whichdeals with insurance and the administration ofinsurance proceeds following a casualty, cannotbe varied if there is a residential component inthe condominium. Similarly, Section 82.007 ofthe TUCA, dealing with condemnation, cannotbe varied either by the CondominiumDeclaration or agreement of the unit owners. Itis worth noting that the TUCA allows the use ofan insurance trustee if the Association deemssuch procedure appropriate. Since a casualty islikely to affect different unit ownersdisproportionately, it is advisable that theCondominium Declaration of a mixed-useproject require that insurance proceeds beadministered by an insurance trustee.

(e) Future Development Rights. Sometimesthe project developer has additional land oradditional space within the project where futuredevelopment may take place. More commonly,the developer is proceeding with the project inphases, with the use designation of the futurephases to be determined as the success of theproject dictates. In other words, the futuredevelopment area could be later designated asoffice, retail or residential (or combinations)depending on which product type produces thegreatest success. Reservations of areas forfuture development must be done within theCondominium Declaration. The developer, asthe declarant under the CondominiumDeclaration, must reserve “development rights,”which are specified in the statute to mean “aright or combination of rights reserved by adeclarant in the declaration to:

A. “Add real property to a condominium;

B. “Create units, common elements, orlimited common elements within acondominium;

C. “Subdivide units or convert units intocommon elements.” TUCA Section 82.003(12).

The future development area can be added as aseparate additional unit to the condominium andthen further subdivided at a later date. However,the development rights must be specifically setforth and reserved in the CondominiumDeclaration in order for the developer to retainthose rights for the future. Moreover, easementsrelating to the construction, development andoperation of the improvements within the futuredevelopment area must all be reserved in theCondominium Declaration, including addressingof additional parking, access, signage, utilitiesand other considerations.

III. OPERATIONAL AND DESIGNISSUES WITHIN THE MIXED-USEPROJECT

A mixed-use project is more difficult to designand operate than one with a single use. Mistakesin design or operation are multiplied many timesin a mixed-use project as opposed to atraditional single-use project – even complexones. Mixing uses complicates how people usethe project and its components. Here are several“flash points” that deserve counsel’s attention:

A. PARKING: Creating workable parkingfor a mixed-use project is typically the mostdifficult task for the developer. Typically,mixed-use projects should benefit from overalllower parking ratios on the theory that sharedparking should be occurring. But making thistheory work in reality is often a challenges.

(a) The project’s parking plan must meet allapplicable codes and ordinances, keeping inmind that different parking ratios may apply forthe differing uses within the project and themunicipality may or may not allow relief fromthe cumulative effect of those usages. Somemunicipalities are capable of recognizing thatthe parking used by the office tenants andvisitors during the day would largely beavailable for the use of the residential ownersand their guests by night. However, theresidents and their guests may compete forparking spaces with retail customers,particularly if the retail component includes

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restaurants, bars, theaters or other late-nightvenues.

(b) The parking plan must also work withthe design of the buildings and the traffic flow ofthe adjoining streets. Parking spaces forindividual residential units may need to be“reserved” in order to facilitate the marketabilityof the residential units; in that case, the parkingspace may actually be made part of the unit itselfor appurtenant as a limited common element.For a hotel within a mixed-use project,designation of a hotel parking area (typically tothe exclusion of other users) may be necessaryin order to permit the financeability and themarketability of the hotel unit. With daytimeevents, around-the-clock restaurants, andovernight guests, the hotel unit may have nearlyconstant demand for use of parking spaces. Insimilar fashion, parking for the residentialunit(s) should be segregated to encourage theresidents to use the designated parking and avoidusing the retail units’ parking spaces. The retailunit owners will need to have parkingspecifically designated as close to the retailspaces as possible, given the public’spreferences over proximity of retail parking.The use of access gates, key cards, enforcementof designated and reserved parking, and signagefor visitors and business guests are typicallynecessary for the parking component of theproject.

(c) Parking rules and regulations mustaddress the varying timing, security and accessneeds of diverse users. The rules shouldestablish operational constraints to avoid“poaching” by others on the free parkingavailable to retail customers.

(d) If parking structures are constructedwith the use of municipal bond financing,additional issues will arise. The projectdocumentation will need to clarify, for thebenefit of the municipal authority, that if themunicipal authority takes title to the parkingstructure, any assessments for common areacharges are not to constitute indebtedness of theauthority, and liability for assessments is limitedto the authority’s ownership rights. Even wherethe municipal authority does not own theparking structure, the authority, at the insistence

of bond counsel, will typically need to requirethat the parking remain open to the public. Thiswill set up tension with the residential users,who will want their parking segregated,restricted and secure. Bond counsel may also tryto insist on preserving the right to determine therate to be charged for parking (if any charge ispermitted at all) and sometimes the right tochange the garage to a non-parking use. Theproject developer must foresee these conflictareas and negotiate accordingly.

(e) If the project includes a supermarket orother large format user whose customers useshopping carts, the parking plan must take intoaccount that customers will need pick-uplocations that are easy to find and large elevatorsto get their shopping carts easily to the parkingarea.

(f) If the parking is underground, gooddesign practices, including openness, lightingand easy access to the project, will be needed toovercome any reluctance that customers mayhave.

(g) If the mixed-use project is to be phased,counsel should consider whether parkingrequirements for future phases should berelaxed, or conversely whether additionalstructured parking needs to be added.

B. ACCESS TO THE PROJECT. Accessto the project itself by private vehicles,pedestrians and public transit is complicated bythe density of the project. Each use has its ownunique needs for access to that zone of usewhich may conflict with other uses and theirneed for access. Once in the project, how acustomer, visitor or resident obtains accessamong the uses – pedestrian and vehicles – canbe complicated, but is essential to success of theproject.

C. VISIBILITY. In mixed-use projects,there is a need to fit a large amount of squarefootage on a parcel and to efficiently use theland for each use. In addition, some non-retailuses, particularly residential, require sensitivityto traffic, light and aesthetics. Traditionally,retail users want maximum visibility. The

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following are suggestions on resolving thepotential conflict over retail visibility:

(a) The extent to which retail must yield toits desire for visibility must depend on thecontext for its customers in the market and thetrade area. If customers are used to finding retailin less than visible locations, retailers should bewilling to compromise.

(b) Building signage can sometimes be asubstitute for free-standing signage; free-standing signage can sometimes be a substitutefor building visibility.

(c) Retailers must be able to retain “brand”appearance, but should become part of thecontext of the center. Architectural elements cansometimes replace building visibility or helpdirect customers to an entrance.

(d) Some projects find success insegregating or grouping uses – giving eachdifferent use a different “face” or perhaps evenchanging orientation to the outside world so asto mitigate retail’s impact on other uses.

D. CONVENIENCE. Most retailers, havecustomers that demand easy “in and out” accessto the stores. Most mixed-use designs encouragea stay at the project so you can live, work, buyand play at all the same location. A guidingprinciple of mixed-use design is to encouragepedestrian use of the project, but retailers mustmeet their customers' demand for vehicle use.As a result, project designers must focus on“intuitive” design - the ability for customers toaccess all aspects of the project whether invehicles or on foot, without excessive thought orinquiry.

E. CONSTRUCTION ANDRENOVATION. Untimely construction orrenovation can be an annoyance to the“neighbors” in the project. Major constructionwork near the retail space may have to becurtailed during the busiest retail periods of theyear. At least, the work should be subject to theconsent of the major retailers. Likewise,construction adjacent to offices should avoid theworkday, and work around the residential areas

should be kept to a minimum during nights,evening, early mornings and weekends.

F. LIGHTING CONTROLS. Residentialand retail owners have different lighting needs,which translate into the need for regulating thehours of lighting and allocating the electricalcosts of lighting. Accommodation of multipleusers may require establishment of uniformlighting hours, perhaps with a process for“purchasing” the right to extend those hours, upto a limit. The retailers may need to “buy” late-night lighting privileges from the residentialowners association at a pre-set price, up to, say,a specified number of total hours per month.

G. NOISE. As with lighting, noisyactivities must be regulated as well. Settinghours for cessation of outdoor activities is oneanswer. Sometimes, more creative solutions arenecessary. For example, a hotel overlooked acentral retail area where live music was oftenfeatured; when the hotel was not fully booked,the hotel placed guests in rooms on the oppositeside of the hotel; when the hotel was fullybooked, the music ended earlier.

H. COMMON AREA MAINTENANCECOST ISSUES. Allocating the costs ofoperating and maintaining the common areas ofa mixed-use project in a fair and equitablemanner can be challenging.

1. Costs of maintaining common area thatexclusively benefits one use should be allocatedcompletely to that use even if located on otherproperty – for example, vertical transportationfrom a parking structure exclusively used byresidential units, utilities exclusively servingresidential units, and signage used to marketresidential unit sales or rentals.

2. Costs of common area that is shared butnot equally are more difficult to allocate – forexample, loading and trash areas. A simple floorarea fraction often will not work (and would bedifficult to calculate since floor area of retail,office and residential uses may not accuratelyreflect intensity of use). In the case of acondominium, the TUCA permits the allocationof expenses to be made on a basis other than theunit owner’s common interest percentage.

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(However, the statute further provides that theallocations may not discriminate in favor ofunits owned by the declarant.) Severalalternative methods of expense allocationinclude the following:

(a) Allocation based on common interestpercentages (the simplest formulation).

(b) Delegation to the Master Association ofthe responsibility to allocate expensesreasonably and fairly (which shifts the expenseallocation analysis to one of control over theMaster Association).

(c) Installation of submeters or other checkdevices for the utilities and other servicesprovided to the project component, withexpenses then allocated based on meter readings(not always available or practical).

(d) Allocation of expenses based onanticipated usage (i.e., those unit owners that usethat portion of the property are allocated itsexpense based on the extent of usage).

(e) Allocation of expenses based on third-party reports of actual usage after a reasonableperiod of usage studied by the third party.

(f) Allocation of expenses based on theappraised value of each participating unit.

(g) A schedule is prepared (usually by theproject developer) identifying each category ofexpense and assigning a percentage allocationamong unit owners for each expense category.

3. How should the impact of phasing beaddressed? If a floor area to floor area ratio isutilized as the cost sharing formula, are onlycompleted buildings included in thedenominator, or are all buildings shown on thesite plan included even if not yet built?

I. PHASING. Phasing occurs in single-use projects for many reasons. Phasing is evenmore likely in mixed-use projects. For example,a residential developer may wait until there aresufficient households under roof to develop landor space that has been designated for retail use.Some impacts of phasing on mixed-use projects

have been noted earlier. Cost sharing issues areparticularly susceptible to the implications ofphasing.

1. Parking Structure Costs

(a) If residential or office uses aredeveloped in a later phase than the retaildevelopment, and if the parking for the firstphase can be constructed on grade but parkingfor future phases must be structured, are theresidential and office developers responsible forthe increased costs attributable to structuredparking?

(b) If a retailer expands its existingbuildings in a subsequent phase, similar issuesmay arise. If more than one retailer expands,how is limited grade parking availabilityallocated?

(c) The project documents should specify towhat extent completion of all parking is acondition to the opening of any expansion.

2. Infrastructure Costs

(a) In a vertical mixed-use project, theupper level development may be constructedupon a podium providing structural support. Ifthe upper level development is constructed in afuture phase, when is the podium constructed?How are the incremental construction costs thatare attributable to the podium and to otherabove-grade construction to be allocated?

(b) The potential interference of such laterconstruction on existing operations in a verticaldevelopment might be even greater than in ahorizontal phased development and should becarefully dealt with in the project documents.Later construction may have to be scheduledaround peak seasonal retailing periods, forexample.

3. Calculation of cost sharing formula.

(a) Land area to land area: This customarysharing formula, that may work well forhorizontal development, is difficult to apply inthe context of a vertical project. As notedabove, floor area ratios in mixed-use projects

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may be inequitable given the disparate intensityof usage among the types of uses in the project.

(b) Impact of mixed uses: Any element ofconstruction, whether or not off site, may benefitone use in a disproportionate manner,compromising the equity of any cost sharingformula that does not take contemplated benefits(and, in some cases, burdens) into account.

(c) Impact of phasing : If undeveloped landis included in the denominator of any fractionalcost sharing formula, the developer will beresponsible for bearing the share for futurephases prior to their development and sale.Performance of site work benefiting a phaseonly when the phase is developed solves thisproblem, but this may not be possible in thecontext of a vertical mixed-use project ifmunicipal approval authorizes (and sets forthsite work requirements contemplating) allphases.

4. A mixed-use project phased over timerequires that retailers be more flexible inimposing use restrictions, but some retailers willstill seek significant protections. Issues in thisarea may be addressed through the following:

(a) Project documentation may provide forgeographical limits to a retailer's approval rights(the farther away, the fewer rights). Thesegeographical limits might also be coupled withlimits relating to potential future phasing. It maybe more difficult for a developer to agree tolimits on phases to be developed in the future ifthe nature and scope of such future developmentis not yet known.

(b) Counsel should be aware that, from aretailer's perspective, any approval rights (andany exclusive use restriction) afforded theretailer should benefit not only the retailer'sexisting premises but also any expansion or newlocation in the project. The flexibility inherentin a mixed-use project (including future phasing)may affect the location and size of the existingretailers.

(c) Project documentation should specify towhat extent a retailer in a future phase will havethe right to impose its exclusive use restriction

upon occupants of prior phases. Largeroccupants will insist upon complete protectionover the entire project. A smaller occupant in aprior phase will need protection at least for itsprimary use; issues can arise if the smallertenant’s permitted use clause allows broadancillary uses.

(d) Counsel may need to scrutinizeexclusive use provisions so that appropriateexceptions can be made as necessary for amixed-use project. For example, the very broadprohibition in a supermarket lease against otherfood uses may need to be modified to recognizenot only traditional restaurants but cart foodvendors, theater food concessions, and officebuilding food retailers (coffee, yogurt, sandwichshop, etc.)

(e) In the same vein, counsel should refinetypical lease clauses that imply that a landlordcontrols all leasing in a project and therefore canenforce exclusive uses project-wide. A landlordmay convey portions of a mixed-use project toothers, including residential and officedevelopers. A provision to the effect that alandlord will use commercially reasonableefforts to enforce exclusive use restrictions ismore realistic. A retailer may insist that his orher exclusive use be included in recordeddocuments to bind the portions of the projectintended to be encumbered by the exclusive.

(f) Project documentation should specifywhose approval is required to waive (in whole orin part) any exclusive use provision. In mixed-use projects that involve several layers ofdocuments, it is important to avoid the necessityof amending each document (and obtaining theapproval of each party to each document) if theintent is that only the retailer imposing theexclusive use restriction (and perhaps thedeveloper) should be the consenting party.

J. IMPACT ON DOCUMENTATION

1. Project documents should requiredetailed cooperation on design documents,emphasizing the design development phase.Counsel should bear in mind that a major retailerwill often insist upon the right to terminate its

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commitment to the project if the design is notacceptable.

2. Design development always takeslonger than anticipated. The project documentsshould provide for adequate time to review,comment on and approve the design documentsat each phase.

3. Retailers should determine whichportions of the common area design or otherproject aspects (such as access, signage orvisibility) are critical to their use of the projectand their brand appearance.

4. Counsel should recognize that majorretailers will want to control the location, sizeand design of the parking facilities and theirrelationship to various uses. Residential usersare less concerned about location and moreconcerned about security, availability, andcontrolled access.

5. Counsel should determine the developerclient’s visibility and convenience solutions andassumptions and ensure that they areincorporated into the project documents. Forexample, if the design approved by thedeveloper assumes visibility over anotherportion, counsel must restrict height on theportion that must be low enough to retainvisibility. View corridors or negative easementsmay be appropriate. If the developer assumesconvenience is aided by a physical connection,say between a parking field and retail door, thenthe documents must require that connection bemaintained in all situations.

6. Counsel will need to document alleasements and operational issues surroundingretail delivery and back room issues – forexample, how trucks access the loading dock,any restrictions on truck deliveries or,conversely, permitted periods for deliveries.These will need to coordinate with the rulesgoverning noise, lighting, etc.

IV. GOVERNANCE.

The most critical governance issue in a mixed-use project is the balancing of control betweenthe various unit owners. Here the term “control”

has multiple meanings – decision-making overdesign elements, construction, and phasing;financial administration; maintenance, repair andreplacement of the common area components;actual control of the property ownersassociation(s); and dispute resolutionmechanisms. Of course, the commercial owners(office, retail, hotel) rarely want to be involvedwith the various residential unit owners.Likewise, the residential unit owners will haveno interest in the commercial units except as to“quality of life” operational issues. TheCondominium Declaration or CC&Rs (and itsrelated documents) must contemplate thesevarious motivations so that the various partiescan coexist within the same structure, notcompete in the administration of the project’soperation, and resolve their disputes through aeffective dispute resolution process.

A. LAYERED OR TIEREDASSOCIATIONS. An effective controlstructure commonly employed is the formationof a Master Association composed ofrepresentatives from each of the usesrepresented in the project: e.g., office, retail,residential, with sub-associations thenestablished under it to govern each specific use.This structure is graphically depicted on thechart attached hereto as Exhibit B. Thisarrangement has particular merit where theproject is organized as a condominium with aresidential unit containing the multi-familycomponent. The residential unit can be furthersub-condominiumized into for-sale residentialunits without creating the possibility of theresidential unit owners becoming involved inproject governance or standards applicable to thecommercial properties.

B. CONTROL STRUCTURES ANDMECHANISMS. The following are examplesof control mechanisms that can be usedcommonly depending on the type of project andthe various components, either individually or incombination:

1. Voting by square footage. Simplesquare footage apportionment of voting willrarely seems to work effectively. Perhaps insmall mixed-use projects, thedisproportionalities of usages are not sufficiently

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evident, but in most projects, the disparitiesmilitate for a control allocation moreapproximating true benefits and burdens.

2. Class voting by use. Class voting isuseful if each class has an appropriate interest toprotect in the matter subjected to a vote. Classvoting can be further subdivided into differingproportions depending on subject matter –project-wide matters must be approved by a voteof all owners, while matters largely involvingone or two uses require the vote of only theaffected owners.

Here is an example of class voting by unit voteallocation, where the project involves severalmixed uses and a parking garage which isseparately owned:

� Votes for general matters not involving theparking garage are allocated on a square-footagebasis among the owners, but the parking garageowner has no vote on such matters. As to anymatter affecting the parking garage, theallocation is otherwise the same, but the parkinggarage owner is granted one vote, and he or shemust vote affirmatively to pass any mattercoming before the association involving theparking garage.

� As to any matter coming to a vote that couldresult in the termination of the project (such asthe termination of the CondominiumDeclaration), the votes are allocated strictly on asquare-footage basis, including the parkinggarage.

� For elections of the Board of Directors ofthe association, the election is made utilizing theprinciples of cumulative voting, and votes areallocated so that each unit will be capable ofelecting one Director to the Board (sometimesthis means pooling of a group of votes toachieve sufficient aggregate votes). The parkinggarage is granted no vote in Director elections.

� Voting rights may be delegated by unitowners to others. For example, the hotel unitowner may authorize the hotel operator to castthe votes allocated to the hotel unit.

3. Control through tiered property ownersassociations. (Discussed above.)

C. THIRD-PARTY MANAGEMENT.Most project developers prefer to have theiraffiliated managers operate and maintain theirprojects, since management can generatesubstantial fees. On a less materialistic basis,the project developer may want to obtainmanagement as an attempt to ensure that thequality of the project is maintained over time. Ifmanagement is to be retained by the developer,disclosure may need to be made to unitpurchasers and lessees as part of the projectdocumentation.

The rights and responsibility of a propertyowners association which may be delegated to amanager should be specified in the projectdocumentation, particularly in the governingdocuments of the property ownersassociation(s). Generally, most of anassociation’s responsibilities for day-to-dayoperations may be delegated to a manager;however, such tasks as the adoption of theassociation’s annual budget or promulgation ofrules and regulations may not be delegable. Inlarger projects, the association may be under alegal or owner-driven mandate to require thatcertain expenses of the project be sent out forcompetitive bid. A further challenge is theoverlay of tiers of association responsibility. Ifthe project is organized through a MasterAssociation and several sub-associations, thetasks of management must be clearly delineatedin the project documentation to avoid overlapsand gaps in the management and maintenanceresponsibilities.

D. TURNOVER. Control of the propertyowners association – and in the case of atiered arrangement, the Master Association – isoften a source of tension between the projectdeveloper and the subsequent unit owners. Theproject developer often wants to keep controlof the association as long as possible in order toassure sell-out of the for-sale units. Adeveloper-controlled association is more likelyto be able to control association expenses and tolimit amendments to the governing projectdocumentation, particularly amendments whichwould compromise the quality of the project. As

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a result, many developers seek the flexibility tomaintain control over the association as long asthey can. Timing of transition of control of theassociation from the developer to the owners(the “turnover”) may be governed by statute(e.g., FHA) or specified in the projectdocumentation.

Each developer should analyze the optimaloccasion for turnover of association control.Many developers review turnover as a method ofachieving a key developer objective of limitingliability, particularly with regard to residentialconstruction. However, it should be noted thatturnover itself does not necessarily terminatedeveloper liability for the acts of a developer-controlled association.

E. DISPUTE RESOLUTION. Due to thenature of a mixed-use project involving differentuses coexisting in a relatively small, definedspace, the likelihood of disputes between ownersis relatively high. Availing oneself of remediesthrough the judicial process may not be the mostcost-effective or time-efficient method ofdispute resolution. Customarily, mixed-useproject developers include a dispute resolutionmechanism within the CondominiumDeclaration to avoid costly courthouse battles.

1. Typically, the dispute resolutionmechanisms favored involve a combination ofmediation and arbitration. The disputing partieswould be compelled to first proceed throughmediation, and if unsuccessful after a period oftime, then to binding “baseball” arbitration(where the arbitrators are compelled to choosebetween one or the other of the disputingparties’ final offers without adjustment orcompromise). A workable dispute resolutionmechanism is crucial to the success of a mixed-use project since the project documentation islikely to be filled with standards such as“materiality” and “reasonableness” qualifyingthe various rights and responsibilities.

2. Counsel should also recognize the needin certain instances for remedies such asinjunctive relief, self-help rights, or “expedited”forms of arbitration to ensure that an ownerwithin a mixed-use project has the ability toprotect and preserve its asset in the event of non-

performance or non-compliance by any owner,lessee or resident within the project.

V. CONCLUSION

By nature, mixed-use projects are complicated,particularly in the need to balance competing orconflicting interests of the different users.While the structuring documentation – CC&Rsand/or Condominium Declaration – give counselan overall framework in which to work, theproverbial devil is in the details: providing forthe equitable balancing of each party’s interests.The key to success in preparing effective projectdocumentation is initially a full and completeunderstanding of the project itself, thedeveloper’s objectives, and the inter-workings ofthe project components, from a structural,operational and usage standpoint.

Robert Eury, President of Central Houston, Inc.,when describing the public spaces of a mixed-use project, has compared a successful mixed-use project to an octopus, reaching out with itstentacles in many directions to draw in manydifferent types of users, visitors, and customers.The trick for counsel is to prepare mixed-useproject documentation that allows each“tentacle” to operate freely and effectivelywithout getting them all tangled up.

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Exhibit A

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MasterCondominium

MasterAssociation

Parking Unit ResidentialUnit

Hotel Unit

Retail Unit

ResidentialCondominium

Units

ResidentialOwners

Association

SharedFacilities Unit

[Optional]

Office Unit

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Exhibit B

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Master Association

Director Director Director Director Director

HotelUnit

CommercialOwners

Association

ResidentialCondominiumAssociation

RetailUnit

OfficeUnit

ResidentialCondoUnits

Elects ElectsElects

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BIBLIOGRAPHY

Divita and Tselos, Condominiums for Retailand Mixed-Use Projects, 2005 UNITEDSTATES SHOPPING CENTER LAWCONFERENCE, INTERNATIONALCOUNCIL OF SHOPPING CENTERS.

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