October 15-November 4, 2014 —
COLORADO REAL ESTATE JOURNAL
— Page 27
Law & Accounting
I
n the past few decades,
interest in sustainable devel-
opment and the desire to
live, work and play in close prox-
imityhave resulted inan increased
number of mixed-use develop-
ments. Successful mixed-use
developments are vibrant neigh-
borhood centers that also address
sustainability concerns by increas-
ing population density, conserv-
ing land resources and facilitating
public transit use.
These benefits come at a cost,
however. The unique character of
mixed-use developments often
makes them more challenging to
develop and manage. This article
identifies some of the legal issues
that should be considered in
order to avoid common pitfalls of
mixed-use development.
n
What is mixed use?
Mixed
use describes developments that
combine two or more distinct
uses, such as residential, retail
and office, within a single project.
Although they vary in scope and
scale, mixed-use developments
generally take the form of a single
vertical building, a group of build-
ings in a limited physical area, or a
combination of the two.
n
Ownership structure.
A
mixed-use development may be
owned either by a single entity
or by multiple entities, each of
which owns a component of the
development. Determining which
structure is appropriate often
involves balancing the benefits
of centralized control afforded by
single-entity ownership against
the degree to which single-entity
ownership complicates develop-
ment and sale of the project.
Divided ownership may be
preferable in developments rely-
ing on use-specific financing that
carries restrictions, such as afford-
able-housing funds. Unless own-
ership is segregated, the afford-
able-housing funds’ restrictions
could burden other uses. Simi-
larly, segregated ownership may
facilitate a developer’s exit strate-
gies by enabling sales of specific
uses, such as retail components
of a development to a real estate
investment trust or other buyer
with limitations on ownership of
nonretail properties.
Segregating ownership may
afford some flexibility, but it also
may add a layer of complexity –
subdivision using a condominium
or other structure may cause a
state’s common interest commu-
nity regulations to apply to the
development.
n
Operational challenges.
One
or more governing documents are
often neces-
sary to coordi-
nate operation
of a mixed-use
development.
The governing
do c ume n t s
may
vary
depending on
the particu-
lar develop-
ment, but they
usually will
establish ease-
ments, iden-
tify restrictions
on use and explain how costs are
to be allocated.
Creating a fair allocation of
maintenance costs and other
expenses incurred by a mixed-use
development can be difficult.Allo-
cating costs of an amenityor utility
is straightforward if the amenity
or utility is used exclusively by
one use or use category – that
user should bear the entire cost.
More often, however, multiple use
categories share common areas
and utilities. Because use of these
shared resources varies in amount
and intensity by use category, the
simplest allocation method (pro-
portional based on square foot-
age) would likely be inequitable.
Instead, the development’s gov-
erning documents should specify
an allocation of expenses based
on the relative demands that dif-
ferent uses impose on the amenity
or utility.
The governing documents
should address maintenance of
shared facilities by specifying who
must maintain the facilities and
how the maintenance is to be car-
ried out. The documents should
provide easements to allow access
to the facilities for maintenance
purposes. Likewise, theymay pro-
tect properties burdened by main-
tenance easements by imposing
notice requirements and guide-
lines for when the work is to be
performed.
n
Leasing issues.
Commercial
leases in mixed-use developments
may take longer to negotiate and
be more complex than similar
leases in single-use developments.
Much of the negotiation will cen-
ter on provisions allocating com-
mon area maintenance expenses
and provisions governing exclu-
sive use rights.
CAM obligations should be tied
to actual use of common areas
if possible. Similarly, costs associ-
ated with use-specific amenities
should not be subsidized by ten-
ants engaged in other uses.
Exclusive-use rights must be
c a r e f u l l y
reviewed to
ensure that
they afford
the flexibil-
ity needed to
attract
ten-
ants. In large
m i x e d - u s e
developments,
where mul-
tiple retailers
may sell any
given prod-
uct, narrower
exclusive use
provisions may be helpful. Provi-
sions can define an exclusive use
more narrowly, such as by specify-
ing a particular type of restaurant,
or by limiting the exclusive use to
a specific geographic area within
the development.
n
Parking considerations.
The
variety of uses in a mixed-use
development complicates deci-
sions regarding the amount and
location of parking. Parking must
be located so as to provide conve-
nient access to retail and commer-
cial components without creating
too much noise or disruption for
residents.
The amount of parking in a
development is often a function
of the ratio requirements in a zon-
ing code. In a mixed-use develop-
ment, however, simply adding up
the parking requirements of differ-
ent usesmay create anunnecessar-
ily high parking requirement for
the development because parking
spaces may be shared by different
uses that create parking demand
at different times. For example,
retail components that require
parking during the daymay share
parking spaces with residential
components that need parking at
night. Under these circumstances,
relief from zoning requirements
may be available to reduce the
total number of parking spaces
needed by the development.
Expectations regarding avail-
ability of parking must be pro-
tected. For example, retail ten-
ants expect (and often require)
free parking for their customers,
while users of office space may
be required to pay for parking.
To protect retail spaces against
“poaching” by office users, access
to retail-specific parking facilities
may be regulated.
Careful attention to the legal
aspects of mixed-use develop-
ments allows developers, tenants,
customers and neighbors to ben-
efit from mixed uses while avoid-
ing problems that could otherwise
stifle the developments.
s
Jay Philp
Otten Johnson
Robinson Neff +
Ragonetti PC, Denver
Kim O’Hagan
Otten Johnson
Robinson Neff +
Ragonetti PC, Denver
6400 S. Fiddler's Green Circle
Suite 1000
Greenwood Village, CO 80111
Phone (303) 796-2626
Fax (303) 796-2777
Deals. Litigation. Great Service.
Merc Pittinos
Matt Dillman
Abe Laydon
Attorneys at Law
Understanding
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you
unique.
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are ever the same.
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