Key Themes

MIXED USED DEVELOPMENTThe legality of mixed-use projects continues to evolve.   

By Paul N. Dubrasich, Esq.

Mixed-use developments are certainly not newcomers these days. For two decades or more, projects that combine two, three or more product types and uses have become commonplace. Even so, the demand for mixed-use developments continues to grow. Evolving demographics, lifestyle preferences and governmental regulations all encourage a trend toward urban infill and transit-oriented communities that combine residential amenities with retail or commercial components. 

Millennial consumers, as well as downsizing retirees, increasingly favor living within walking distance to retail stores, health and fitness centers, restaurants and cultural venues – as opposed to residing at the distant reaches of urban sprawl. How these mixed-use projects are developed and operated, however, continues to evolve with experience not only from a marketing standpoint, but also as a matter of operation and legal risk management.

Every mixed-use project is different, designed to address the intended market of residents, workers and visitors at the specific location. In urban settings, the design and mix of uses may also be highly regulated. Development entitlements may be conditioned on affordable housing mandates, energy efficient design requirements, traffic demand management programs and sustainability. 

Legal and risk management issues that come into play, while universal and common to every project, must be examined more closely in mixed-use developments, and may impact the final planning in significant ways. Here are some overriding legal themes that need to be considered in every mixed-use project:

Subdivision – The subdivision of components within a mixed-use project may not be necessary when the developer intends to keep the entire project in a single ownership as an investment. When the plan includes a division of ownership, however, such as selling residential condominiums or spinning off a retail component, subdivision of the separately owned airspace or parcels is a legal requirement. This may mean a horizontal or vertical subdivision, sometimes both, or the creation of one or more condominium projects.  Each of these types of subdivisions involves its own state and local approval processes and, especially with condominium projects, regulatory requirements regarding operation, management and sale.

Prevailing Wage – While mixed-use projects are not necessarily subject to prevailing wage laws, particularly if they are not supported by public subsidies or grants, they may not qualify in some states (like California) for automatic exemptions. A fee credit or other incentive provided by a public agency could inadvertently trigger prevailing wage requirements for a mixed-use project, which could impact the bottom line to a far greater degree than the credit or incentive itself.  

Security – The public access necessary to accommodate commercial and retail components of a mixed-use community means the developer must give greater consideration to safety and security in the design of the entire project.  For instance, the creation of internal plazas and common areas that are not visible from public streets, but are accessible by the public, can invite potential squatting and crime. The project design should address secure ingress and egress for residents, including whether retail and residential components will share elevators, if parking areas will be segregated or gated, and whether common areas and amenities will be made available to different project components. In addition, adequate lighting not only makes common sense, but it may be a legal and risk management necessity to avoid future design liability.

Reciprocal Easements and Uses –  Generally, all condominium and other common interest development projects are governed by declarations of covenants, conditions, and restrictions (CC&Rs) that contain easements for use of common areas, parking and paths of access. This is nothing new. Mixed-use, however, brings with it the potential for incompatible uses and the need for additional easements. Obviously a nightclub or saloon may not be suitable immediately below residences. Even quieter retail uses, such as restaurants, may require special easements through the building for proper ventilation, odor or pest control. Special private use restrictions should be created with the CC&Rs or other agreements that are strict enough to appease residents, but flexible enough to make commercial/retail spaces marketable.  

Parking – Parking is almost always a concern in new mixed-use developments. It is both a design and operational issue that should be examined early on. The amount of allowable parking may be impacted by many factors, including supply and demand, entitlements and proximity to public transportation. Whether parking is assigned or unassigned, self-park or valet, free or fee-based, operated by a private company or an owners’ association, are all questions that should be addressed early in the planning process. If parking is available for both commercial/retail and residential use, the design ideally should incorporate segregated parking areas for each. Trends toward electric and driverless vehicles, as well as ride share systems, also need to be taken into account. 

Organization and Governance – Where commercial and residential components exist in the same building project, organizational issues can become complex. The differing interests of residential and commercial owners can lead to conflicts in management control, design review of modifications, use restrictions and association dues. Simple concepts like the collection of reserves for future capital replacements of common area components — a legal requirement for residential projects — can be a matter of dissention simply because retail/commercial owners often cannot pass reserve contributions on to their tenants as “CAM” charges. 

In a single owners’ association situation, consideration must be given to which component controls a majority of the board of directors. The governing documents should provide that management decisions affecting solely the commercial or residential component should not be made without the approval of representatives of that component. It is sometimes possible to segregate commercial and residential operation and management into separate owners’ associations, with a reciprocal easement agreement or master association created place to govern the management solely of shared facilities. This often depends on the design of the project and the legal structure of the subdivision.   

Sales Regulation and Disclosures –  In practice, commercial and residential properties are marketed differently.  They are appraised by different methods, measured by different standards and sold under different types of sales contracts.  Developers need to keep in mind, however, that mixed-use projects are, for the most part, governed by residential common interest development laws and regulations as if they were purely residential. In many, if not most states, legal requirements for selling residential lots or units in a common interest development, and laws regulating how common interest developments are operated, apply equally to mixed-use developments.  

From a risk management standpoint, builders of for-sale mixed-use projects should be vigilant about providing detailed project disclosures, which highlight the benefits and challenges of living in close quarters with other types of users and occupants.  

Well-designed mixed-use projects are essential to the revitalization of urban areas. They can, on a large scale, create vibrant and fulfilling living environments for both young and older residents.  The rewards can be maximized by developers paying close attention to, and addressing in the design and legal governing documents, the challenges associated with residential and commercial owners existing in close proximity and sharing obligations of project maintenance, security and operation. 

Paul N. Dubrasich, Esq., is a partner in the San Francisco office of Cox, Castle & Nicholson LLP.  He focuses his practice on real estate sales, finance and development, with broad experience in residential, commercial and mixed-use condominium, planned development and master planned communities. He may be reached via e-mail at pdubrasich@coxcastle.com.

 

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