The Secret Weapon Behind Successful Mixed-Use and Multi-Use Developments

The long-term success of a mixed-use, multi-use or multipurpose real estate development depends on the project’s governance documents.

By Charles Brecker
Brecker-Charles-CroppedOften, the long-term success of a mixed-use, multi-use or multipurpose real estate development depends on the project’s governance documents. Those documents, which can be carefully scrutinized by prospect lenders, buyers and residents during their due diligence, can make or break a deal. At the same time, ineffective governance documents can be the cause of complex and costly litigation for developers.

Drafting strong documents is the responsibility of the developer’s counsel, who must pay careful attention to the desired results of his/her client and seek to fulfill that which the developer intends to build, sell and/or lease. Counsels have to be mindful of the importance of building “flexibility” into the project’s governance documents. They need to fully understand whatever intricate design is being proposed and be able to craft appropriate documents that implement the project’s overall governance and management. They also need to carefully analyze how each component of a multi-use or mixed-use project will coexist, operate and fit within the synergy of this proposed enclave.

Keep in mind that there are distinct challenges in drafting master covenants for horizontal as opposed to vertical mixed-use projects, as well as those which govern an entirely-residential community with a variety of dwelling units, often mixing for-sale and rental neighborhoods. It is important that counsels understand the sometimes-fractious relationship that can occur due to uses and even income levels of residential enclaves being remarkably dissimilar. That knowledge helps counsels anticipate some of the typical causes for disputes between each of those enclaves.

The means the project ultimately approved by the applicable governmental body often includes “conditions of approval,” which includes land dedications for parks, schools and other public facilities, roadway dedications and improvements, both on-site and off-site, and necessity to tie into existing utility or drainage systems. That process can similarly pose challenges to both the drafting of appropriate provisions detailing those arrangements, and ensuring that such added costs are also captured by the client’s management company when projected operating budgets are adopted.

I have found it helpful to take a “top-down” approach and focus on the expected makeup of the project, identifying each use, its respective density, FAR, etc., and expected cost to maintain. For projects that involve vast acreage, or square footage of improvements, it is typical for developers to design projects in development “phases” with the planners, architects and designers, as well as engineering, environmental and traffic engineering consultants being a part of that discussion.

It is also critical to discuss early-on the developer’s financing goals, including the expected capital stack. Private equity lenders and hedge funds may pose far greater control over a project. That may involve catering a project’s master covenants to address those concerns, which may differ from the more typical institutional lenders, especially money center banks.

What role would a developer’s counsel play from the outset? Often a developer’s plans will include sales of individual components of a master-planned community to sub-builders or developers. Depending upon the nature of the project—and especially those which include vertical mixed uses, it is paramount that each subdivision or component of the project operate consistently with the master community. For example, will each “owner” be a member of the vast HOA or POA, or will that HOA or POA have “representative voting” whereby only one person would represent the neighborhood or commercial component as to “master” voting matters, ostensibly as a representative of all owners within that portion of the project.

That is usually much more workable aside from having to comply with what might be a typical set of “master covenants” or a form of “REA,” a reciprocal easement and operating agreement, and those owners (and often residents) must then contribute some allocable share of the overall project’s operating costs each year. For most vertical mixed-use projects, and some horizontal ones as well, there may be “shared components” or “shared facilities,” which are managed and maintained by the master developer or its affiliate for an extended time period, perhaps in perpetuity. That is especially true for certain hotels, condo hotels and other hospitality developments.

It is critical to identify any pre-existing financial obligations (such as infrastructure taxing districts) which must be satisfied by the developer, and typically subsequent owners and/or tenants) or those which may now be formed due to a new development being proposed (e.g. Special Taxing Districts, Community Development Districts, and the like).

A well-designed project, from a legal perspective, is one which is fluid and effectively incorporates various uses in a fashion which blends all of them into a harmonious and synergistic relationship whereby owners and tenants can live, work and play without onerous restrictions and dysfunctional management.

Finally, from a legal perspective, there are numerous state and federal requirements and limitations that counsels must not only comply with, but ones which may necessitate proper disclosures and even filings with agencies such as the Interstate Land Sales Full Disclosure Act division of the Consumer Financial Protection Bureau. Many states also require filings of condominium, timeshare and even homeowner’s association-type developments. In addition, the vast array of land use and environmental laws and states mandate the involvement of those specialists who can properly guide the developer through those many minefields.

The financial and aesthetic reward for a developer may be vast. Yet, the inherent risks and potential liability for not handling the structuring of projects in a fashion which protects a developer from liability while creating flexibility in design and use is the challenge faced by counsel and may be critical to the success or failure of any given real estate development.

Charles Brecker is a partner in the Miami office of Arnstein & Lehr. He is a member of the firm’s Commercial & Real Estate Finance Transactions and Real Estate Practice Groups. Brecker represents residential and commercial real estate builders and developers, as well as investors, in acquiring, financing, developing, building, selling and leasing residential, commercial, and mixed-use projects. Brecker co-authored the “Planning and Structuring of Real Estate Developments Using Condominium and Community Associations” chapter in the Florida Bar’s recently released book: Florida Condominium & Community Association Law, 3rd Edition.

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