From Town Square to Mixed-Use Developments

By: Robert (Bob) H. Voelker
April 14, 2008

I recently picked up two books on the history of cities. Both books mention the importance of town squares as early meeting points and cultural and civic centers of their communities. These town squares were true gathering places and provided a sense of place where people could live, work, be entertained and, in a certain sense, identify.

Over time, as cities aged and became more industrialized, and with the advent of a car in every garage, it became not only possible but desirable to live farther away from work and the problems of the inner city, creating the rush to suburbia. In the United States, this phenomena coincided with the Civil Rights movement and court ordered inner-city busing, exacerbating the flight to the suburbs. As wealthy residents fled to the suburbs, major corporations followed, choosing campus-style low-rise headquarters over downtown office buildings.

Arguably, the workaholic baby boomers – another social paradigm shift – also furthered the growth away from the social nature of the old town squares. Baby boomers are in many ways less social than their parents – the days of cocktail parties and pot luck church dinners are only distant childhood memories. The suburban lifestyle of a 3-car remote control garage, and a fenced in back yard, are but small evidence of the social isolation tendencies of the suburban generation, a generation not well suited for the social dynamics of the town square.

As these forces coalesced to move people away from denser urban lifestyles, social, political and economic forces of the 21st century are behind the current interest in inner-city revitalization centered around dense, mixed-use projects.

My son and daughter are in their early 20’s, and are highly social. They were early teenagers when instant messaging and text messaging were invented, and communicate constantly with their friends and family in this fashion. This generation plans their night and weekend activities on the fly from their phones and BlackBerries. My sons last two apartments have been in mixed-use transit oriented developments where he can sleep, exercise, eat and play without using his car. University campuses are creating privately owned “student housing” near or on college campuses, many of which are multi-story apartments over retail developments. In short, the next generation of American workers are highly comfortable with and desire denser lifestyles with conveniently located amenities. The cost of gas, traffic congestion, metropolitan pollution and the “green revolution”, along with aggressive efforts by major cities to attract mixed use and transportation-oriented development, are all creating the perfect storm for strong future demand for the re-densification of real estate in the urban core.

Over the last 6 months, I’ve encountered developers looking at:

• Apartments over retail along an urban street.
• Apartments over retail as part of a larger mixed use residential/retail/office/hotel development in the suburbs, but along a major arterial road.
• Outdoor “lifestyle centers”, often incorporating town halls and other civic services (libraries, police stations, etc.), retail, restaurants, coffee houses, health clubs, etc.
• Hotels over retail and hotels over office.
• Joint office towers and apartment towers

What do these trends mean for hotel and apartment developers? Densification of real estate around mixed-use projects will occur in the inner city and the suburbs. In the inner city, true single family residences (mainly condominiums) will be mixed in with retail, office and hotel uses. To justify the high cost of 4- and 5-star hotel developments, these other uses are critical to “buy down” the debt on the project and the cachet and velocity of the hotel adds intrinsic value to the other real estate components.

In the suburbs, the same development concepts apply, although on a lower density basis, without (for the most part) the single family ownership (condominium) element, although lower density townhomes and condo “flats” are not uncommon in some of the trendier and more progressive suburbs. In the suburban densification model, the hotel is unlikely to be a 4- or 5-star hotel, but given the proximity to corporate campuses and the desire of corporate travelers to not be isolated in stand-alone hotels, extended stay or 3+ star hotels are a great addition to any well planned lifestyle retail center.

Recent transactions that I’ve encountered have a common theme. A non-hotel developer is creating a mixed-use development that has a hotel component and a hotel developer wants to build the hotel. The parties rush off and enter into a letter of intent or a purchase contract that is modeled on a straight-up land purchase with horizontal development of a stand-alone hotel, providing for 90 days due diligence and a 60 day close, and all definitive documents are to be drafted during the due diligence period.

Although this exuberance to get the deal structured and close quickly is admirable, as a practical matter a multi-use master plan requires attention to numerous details that take time and many of which only “flesh out” as the integrated mixed-use project is designed. The following is a basic checklist of only some of the complications that must be addressed: 

1. Who takes the lead in architectural and aesthetic matters? 
2. How will design and construction costs be allocated? 
3. What mechanical systems will be shared?  
4. What “facilities” will be shared – parking? loading docks? trash/recycling rooms? etc? 
5. What are the implications of the one of the components being complete before the other components?  
6. To the extent the uses share a platform, systems or facilities, how will the co-developers, their lenders and equity partners, be certain that the other  developer will pay for its share of the costs?  
7. Who takes the lead in construction coordination/oversight, processing draw requests, etc.  
8. What are the implications of a construction change order if the change delays the construction of the other components of the mixed-use project? 
9. How are land cost and infrastructure costs allocated?  
10. What easements are needed so that each component has egress/ingress, use of common areas, and shared systems and facilities?  
11. How will each component’s debt and equity structures be closed simultaneously to allow construction to commence?  
12. How will disputes be resolved?  
13. How will common areas be maintained?

A tremendous amount of focus and cooperation is needed between the co-developers in order to resolve these issues in a timely basis, and these are only a few of the difficult issues that need to be resolved before the developers and their financial partners will be ready to close the transaction.

Given this level of complexity, the letter of intent or purchase contract should require only that the co-developers agree on basic conceptual site plans, building schematics and the terms of a “Cooperation Agreement” during the due diligence period. The Cooperation Agreement is really nothing more than an “agreement to agree,” an advance form of letter of intent, that allocates design development costs and other pursuit costs between the parties, lists the development obstacles to be overcome, establishes the pre-development timeline, and engages both parties in using their good faith best efforts, on a non-binding basis, to resolve the development issues and create an acceptable level of certainty to allow closing to ultimately occur. In a highly complex mixed-use development, it is not uncommon for this non-binding Cooperation Agreement to be the operative document for up to 2-3 years.

The key to working through these pre-development issues is really to find a development partner that is equally committed to the project and who views the resolution of these myriad complex issues as an opportunity for a win-win for all of the components of the project are enhanced as the dynamics of the interplay of the mixed-uses creates greater value for all of the parties.