Coordination between Multiple Developers in Hotel Oriented Mixed-Use Transactions
By: Robert (Bob) H. Voelker
August 2007
Hotel oriented mixed-use developments are highly complex, with horizontally and vertically integrated ownership, condominium declarations to create the various components and facilitate future sales, restrictive covenants to control uses, agreements with the hotel brand or operator, etc. When co-developers are interjected into the transaction, the level of complexity increases geometrically.
Early in the negotiations, the co-developers should enter into a “Cooperation Agreement” that outlines how the parties will coordinate design and construction of the mixed-use components. Unfortunately, the details of this coordination/cooperation will be very difficult to determine with certainty given the dynamics of the development of such a complex transaction, and the Cooperation Agreement will in many places be an “agreement to agree” as the parties flesh out the particulars, and the document will go through several rounds of amendments and restatements as the details become more settled. Among the issues that arise with co-developers are:
Plan and Construction Coordination: Particularly when the development is “stacked” horizontally, the construction plans for all of the mixed-use components must be highly coordinated, from architectural design to structural and systems support. The hotel architect may not be familiar with retail or apartment design issues, and the retail or apartment architect will likely have no hotel experience. The exterior aesthetics of the hotel are critical, but the quality of construction materials for the hotel may be problematic for the apartments or retail development budget. Mechanical systems (e.g., storm water vaults, transformer rooms, backup generators), drive lanes, parking ramps and other similar facilities should be shared where feasible to minimize costs and valuable land area. The co-developers should seriously consider hiring one architect for the entire project, or at least granting one of the architects the authority and responsibility to act as lead architect in integrating all of the plans, and sharing some of the critical engineering design firms (e.g., mechanical/electrical/plumbing and structural) will also facilitate plan coordination. In mixed-use projects that are structurally integrated, the co-developers should also agree on one contractor for the entire project to avoid “finger-pointing” when construction issues arise, and one of the developers should be designated as the construction draw preparation agent, with approval rights granted to the co-developers.
Construction Cost Sharing: Developers are typically reticent to move forward incurring significant design and carrying costs without some comfort that the development budget is acceptable, but in a mixed-use project the plans and budget are developed simultaneously and continuously up to the closing date and start of construction, and determining the cost sharing between the co-developers is a complex process involving the architect, engineers, contractor and construction representatives from the co-developers. Underground parking garages also serve as the “platform” for the development and contain back-of-house elements (loading docks, mechanical systems, etc.) that serve multiple parts of the development, and frequently the co-developers will own or use differing portions of the various floors in the underground garage. Structured above-ground garages, although not serving as support for the development, may contain external walls for the various uses, and parking spaces may be shared between the uses (retail or office during the day, residential at night, etc.). Determining sharing ratios for the concrete and structural support elements is more art than science.
Securing the Development Obligations: Given the interdependence of the components of the mixed-use project, each of the co-developers (and each of their lenders and equity partners) will want comfort that the other co-developers will perform their development, construction and financing roles, particularly as land is acquired and construction commences. The cooperation agreement should contemplate the formation of an escrow funded by cash or letters of credit from each developer for their corresponding obligation to contribute to the soft and hard costs of the development, that can be drawn upon in the event that a developer defaults. Without this security, the default by one developer could jeopardize the construction of the platform or common elements of the project and create cost increases for the other developers.
Maintaining the Common Elements: Mixed-use projects by their nature result in the sharing of roadways, mechanical systems, trash and recycling facilities, elevators, parking garage ramps, landscaping and other “common areas.” The condominium declaration or separate restrictive covenants should address maintenance responsibilities and cost sharing for these common areas and, to the extent the common areas generate revenue (e.g., shared parking spaces), a method of dividing any net revenues. Alternatively, a common elements maintenance committee can be established that oversees maintenance and that drafts and enforces common area rules and regulations for the benefit of the entire mixed-use project and its various users.
