Mixing Legal Issues With Mixed-Use
Mixed-use developments carry legal issues separate from retail developments.
Scott Fisher and Phil Skinner

Fisher

Mixed-use development is a way to differentiate projects and create popular and profitable developments that offer a live, work, shop and play environment. Such projects differ from ordinary real estate projects in that they often involve dense developments that integrate a variety of uses across horizontal and vertical planes. While mixed-use development is nothing new in many areas of the country, over the past several years there has been a proliferation of mixed-use projects in areas that historically did not experience development constraints that foster mixed-use projects. The purpose of this article is to discuss some of the issues and themes that must be addressed in order to create a successful mixed-use development.

A threshold question for any development is the availability of zoning for the project. Older zoning codes often do not contemplate mixed-use projects. Special zoning classifications may need to be considered and, depending upon the jurisdiction, a new zoning classification may need to be created. Site specific zoning, which is often the solution, balances the needs of the developer to maximize developable square footage with the desire of the governmental authority to ensure that the development satisfies certain standards. Since mixed-use developments tend to be high profile projects, adjacent neighborhoods may be quite active and vocal in the zoning process. Consequently, the developer should work to ensure that a constructive dialogue ensues and that good compromises are reached to protect the parties’ divergent interests.

Skinner

Generally, easements for a horizontally integrated mixed-use development are similar to the easements included in any type of single-use development with multiple parties, such as a shopping center or office park. However, if a mixed-use development includes uses that share space across three dimensions the scope and complexity of necessary easements changes dramatically, particularly where many facilities are shared among the multiple uses. Some examples of shared facilities may include common or shared entryways, lobbies, vertical transportation, access, trash facilities, utility conduits and rooms, loading docks and parking. Easements that should be considered include easements for shared vertical transportation (e.g., stairwells, escalators and elevators) and other common elements of shared buildings and structures, such as lobbies, driveways and parking deck ramps; parking easements that address exclusive and non-exclusive parking areas, nested and open parking areas, and shared parking facilities; easements for shared trash facilities; easements governing loading dock use and delivery times; crane swing easements to allow one owner to use an overhead construction crane over another owner’s property; and easements for construction staging.

When establishing standards for minimum insurance requirements it is important to take into account that, in a multi-use project, each use may have different needs or contractual requirements as well as different expectations for the disposition of insurance proceeds. In this environment there are a number of threshold questions. How should the property insurance be provided? Who has an insurable interest in what property? Who should pay for the insurance? Who should administer the proceeds in the event of a casualty? What are the respective parties’ rebuilding obligations? Many of these issues will be determined by a combination of the practical needs of the various owners and by the constraints imposed by available insurance coverage. These questions should be answered in consultation with a knowledgeable insurance agent or consultant.

Providing for continuing routine maintenance and repair is normally a relatively simple matter that becomes more complicated in a mixed-use development. The party who is responsible for each item of maintenance and repair must be identified, as should standards for repair and maintenance. The cost of such maintenance and repair will have to be equitably allocated among benefited parties. In the event that a party fails to adequately maintain their property or the common elements that they have contractual responsibility for, other parties should have self-help rights and lien and/or other cost-recovery mechanisms to ensure that the overall project will be maintained to the required standard.

Mixed-use developments with shared facilities are likely to impose CAM charges related to the operation, maintenance, repair and replacement of such shared facilities. It may be appropriate to have several layers of CAM charges. Equity should dictate how expenses are allocated among the different owners and different uses. For some categories of expenses, it may be appropriate to allocate expenses pro rata among all owners or based on square footage. Other expenses may be more appropriately allocated on the basis of weighted formulas that account for the different density, frequency and nature of the uses made by each party.

Shared parking facilities are a common feature of most mixed-use developments. As with other shared elements, different uses will inevitably have different perspectives on the shared parking. Issues that should be considered with respect to shared parking include, for example:  who owns the parking facilities; whether there will be a fee for use of the parking spaces whether there will be a separate CAM charge for operating and maintaining the parking facilities and, if so, how parking revenue will be allocated to the various owners; whether optional valet parking services will be permitted, and, if so, what spaces are available for valet parking use, and whether individual parking spaces or certain parking fields will be exclusive or non-exclusive? Exclusive parking spaces are popular for residential and office uses but not typical for retail uses. Exclusivity may adversely affect parking efficiencies and undermine reduced parking ratios. “Nested parking facilities” (i.e., parking areas that are physically separated from open parking areas, such as by fencing or gates) are often desired by the residential component of a multi-use development. The physical segregation of residential parking areas from commercial parking areas arguably creates a sense of security for the residents and their vehicles. However, nested parking facilities may disrupt access and traffic flow within a parking structure, or cause the parking facilities to become disjointed, or take up additional area that could have otherwise been used for shared parking spaces. Other issues include whether a single parking management company is used for the entire parking facility or should each owner choose their own management company and how multiple management companies will work together in an integrated parking structure?

In a mixed-use development the developer may want to impose that an overall design theme. An integrated design theme is arguably of value to the entire project, though it may have a disproportionate impact on a particular use or structure, and will inevitably limit each party’s creative freedom. As part of the design theme, an overall signage program should be considered. The ability to control the aesthetics, quality of materials, type of construction, colors and other intangible considerations should be weighed, but national retailers may require the use of their national sign programs.

Mixed-use developments are often structured by creating separate condominiums for each use. For example, a building might have a retail condominium at ground level, an office condominium above the retail, and a residential condominium above the office. This structure allows the developers to take advantage of established laws governing condominium projects, but also subjects their development to laws that may not fully take into account the needs of a multi-use project. This may limit flexibility that might otherwise be desirable and may be achievable in a fee simple, air-rights ownership structure. Use of a master condominium structure in addition to the residential and commercial condominium declaration can be an effective way to manage common infrastructure in a mixed-use condominium ownership based project.

Developers of multi-use projects must focus on project financing. In particular, a developer should be careful to consider and address the requirements of both construction and permanent lenders, covering issues such as insurance requirements, rebuilding rights and control of insurance proceeds. In addition, the lender’s right as a successor owner should be recognized in the governing project documents. The owner or the owners of the project should attempt to involve lenders as early as possible since subsequent modifications of governing documents will potentially require the consent of multiple other owners as well as their lenders.

As with any commercial real estate development, appropriate attention must be given to environmental issues for any mixed-use project. Since many mixed-use developments are large, and since some such developments occur in urban areas that are being redeveloped after years of prior use for other diverse purposes, the opportunity for environmental concerns to surface is often considerable. Where environmental risks are identified, the developer and his environmental counsel and environmental consultants may have to work to craft a combination of remediation work and environmental insurance to mitigate any environmental risks. Such work should be done early in the life cycle of the project for the project to become financable, marketable and leasable.

There are a multitude of legal and related issues to be considered and resolved in order to develop a successful multi-use project. Failure to consider and appropriately resolve these issues could undermine the ability of the developer to achieve its financing, leasing, operating and sales objectives.

Phil Skinner and Scott Fisher are partners with Atlanta-based law firm Arnall Golden Gregory. Skinner can be reached via e-mail at philip.skinner@agg.com, and Fisher can be reached via e-mail at scott.fisher@agg.com.