Navigating the Complexities of Mixed-use Development

During the last two decades the number of mixed-use developments has increased significantly and isn't showing signs of slowing down. Described as an environment where a person can live, work and play, a typical mixed-use project consists of ground floor retail with either housing or office space above. Other mixed-use projects include entire neighborhoods where different uses are mixed together in close proximity. In any event, mixed-use development remains extremely complicated. The developer must balance what may be conflicting uses and priorities. Before a developer considers tackling a mixed-use development, he or she should carefully consider the entirety of the project.

The Challenges

Many challenges confront the developer of a mixed-use project, including added complexity due to the multiple uses, restrictive zoning codes, increased construction costs, difficult-to-obtain financing and a lack of suitable locations. The first step a developer needs to take is crafting a plan with the assistance of a development team. Members of the team will change throughout the process, but at any given time, the team may include potential partners and investors, attorneys, public agencies, architects, engineers, contractors, lenders and tenants.

The developer must focus on finding the right location and gaining control of the property. Uses must not only be internally compatible, but must also be compatible with the surrounding area. Obtaining the approvals required for a mixed-use project will be challenging for the developer. A change in zoning, which is a time consuming process, will be required, and will most likely draw heated opposition from nearby and surrounding property owners. Purchase contracts must contemplate and provide sufficient time to satisfy the contingencies upon which the development is dependent. These contingencies include, without limitation, acquisition of other parcels, zoning and site plan approval and financing. If the project requires an assemblage of multiple parcels and the developer contemplates using eminent domain to acquire any such parcels, it must be cognizant of the mandates and constraints imposed by applicable laws. The Missouri legislature recently amended Missouri's condemnation law to add premiums to the price to be paid for condemned properties, which have been owned by the same family for more than 50 years and/or constitute principal residences, and to increase relocation benefits. Further, the use of eminent domain to acquire property for private use has come under scrutiny, and Missouri law now prohibits its use for "solely economic development purposes." Eminent domain is available to acquire blighted or conservation areas, but what constitutes "blight" is subject to interpretation and if judicially challenged, will significantly delay and increase the cost of the project.

Finding the Funds

Mixed-use developments are costly to develop, and in all likelihood, will require road and utility work and significant infrastructure expenditures. Banks may be reluctant to accept the exposure inherent by the size and scope of such developments, and financial incentives such as tax breaks and bond financing are often required. Public assistance for mixed-use projects is often provided under one or more of the following Missouri statutes: the Property Tax Increment Allocation Redevelopment Act (TIF), which authorizes the use of incremental real property and sales tax revenues to fund redevelopment project costs; the Transportation Development District Act (TDD), which authorizes the imposition of sales taxes, property taxes and/or special assessments to fund transportation-related improvements; and the Community Improvement District Act (CID), which authorizes the imposition of sales taxes, property taxes and/ or special assessments to fund community-related public improvements and services. To get public assistance, the developer will need to endure the administrative process, which entails participation in public hearings and encourages the expression of public opinion and sentiment, which is often critical.

Whether public or private financing is used, the availability of funds will depend on there being sufficient presales and/or leasing. A mixed-use commercial lease is complex. It is the developer's job to look at surrounding uses and determine what the market can withstand. The developer must also consider what uses would be marketable and financially feasible. It is important to remember that although the lease is with the developer, the maintenance and governance of the common areas of the project may be turned over to a condominium or homeowners association, and that not all users get along. Residential, retail, and office users compete for parking; retailers complain about support columns that are essential in multistory buildings, but interfere with their open store formats; and residents complain about noise from delivery trucks. For a mixed-use project to succeed, architectural controls must be adopted, and the responsibility for maintaining and operating the common areas of the development must be equitably allocated amongst the users. Each must pay their respective share. Further, each user must be reasonably assured that its use will not be interrupted or adversely affected by the use or change in use of other parcels in the development.

As a result of such complexities and challenges, mixed-use developments take time and have significant front-end costs for site control, market and feasibility studies, planning, design, engineering, legal and other professional fees, all of which are at risk if the project is not ultimately approved. However, for developers with the stamina to survive the process, mixed-use developments can be an efficient and effective use of land, and a huge success for the community.

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