Shopping Center Business

OCT 2016

Shopping Center Business is the leading monthly business magazine for the retail real estate industry.

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PRE-DEVELOPMENT 104 • SHOPPING CENTER BUSINESS • October 2016 W e've all heard the adage an ounce of prevention is worth a pound of cure. Nowhere is this more apparent than in commercial real estate. For developers embarking on a mixed-use project, there are many factors that should be taken under consideration prior to beginning a mixed-use project to ensure the success of the development. FACTORS BEFORE STARTING A PROJECT Today's mixed-use projects are typical- ly located in dense urban or suburban markets where higher land costs dictate maximizing development opportunities across multiple commercial asset classes. While there are few sizable commercial developers who have the wherewithal and experience to handle the develop- ment, ownership, leasing and operation of a mixed-use project, most mixed-use projects involve some sort of joint devel- opment, co-development or other joint venture structure to assemble the neces- sary experience and financing. It is important for developers to recog- nize their strengths, weaknesses and lim- itations at the outset and to avoid the trap of trying to assume risks and complexities on their own. Further, it's critical to proj- ect and gather the capital stack for the project e arly in the pre-development pro- cess. Equity and debt sources also have their limitations, expertise and comfort levels with certain assets and classes. Finding a single lender to handle all facets of a mixe d-use commercial devel- opment is possible, but the field of lenders who can handle an expensive mixed-use project incorporating retail, residential, , hospitality and other disciplines is limited. Similarly, when considering one's exit strategy, there are a limited number of potential purchasers who can buy, own, lease and manage across multiple asset classes. For all projects, particularly urban developments, there are several critical factors to weigh. First and foremost is supply and demand. Other consider- ations include access to public transpor- tation, convenience to business and nodes and proximity to restaurants and entertainment. In this post-recession era, we have wit- nessed a rapid and substantial migration back into urban cities, continuing to sup- port the desire of millennials, Generation Xers and other demographics to seek out the best live, work, play locations. Because commercial mixed-use proj- ects typically have a longer pre-devel- opment and construction process, the developer's market analysis must take into account both the current and pro- jected market and capital circumstances. If it will be more than two years before construction of a project is completed, awareness of other competing projects and potential market pricing and satu- ration levels is critical. FINANCIAL FEASIBILITY ISSUES The development and infrastruc- ture costs for mixed-use developments are substantial. Rarely does one have enough acreage to easily handle all the necessary parking, storm water reten- tion, sewer and other required common facilities and utilities without developing vertically. Additionally, certain improvements are often necessary to up- date and improve overburdened public resources. As such, it is important to iden- tify and consider any and all local, state and federal incentive opportunities, such as real estate, sales and other tax credits and abatements early in the pre-develop- ment process. Although these financial assistance programs are often not well known or publicized to those in the private sector, there are many programs that are ap- proved and available for developers who know enough to ask the right questions. Many of these programs generate signif- icant fees for the municipalities involved, and the public sector is heavily incentiv- ized to conceive programs to assist pri- vate developers with means to high land and development costs. JOINT DEVELOPMENT Many of today's mixed-use projects bring together two or more developers. Multiple developers may partner in dif- ferent ways to jointly develop and own a project or certain aspects of a project. Various developers may also choose to divide the project (both horizontally and vertically) into ent component parts. When developers partner to jointly de- velop a project, the process will require heavily negotiated and often complex joint venture arrangements. In these instances, issues such as control, capital investment, financing, operations, tax im- plications and exit strategies must be fully vetted and negotiated. In contrast, when developers divide the project into - ent components, the subdivision (typical- ly both vertically and horizontally) of the property will be required. This will entail complex coordination in advance among experienced professionals including, de- sign, engineering and legal experts who should remain integrally involved in the process. In developing the proforma for a mixed-use project, it is essential to proj- ect the costs for the required experienced professionals because the learning curve is typically extensive and expensive. SCB Bob Simons has been practicing commercial real estate law for over 22 years, and is the head of Hartman Simons & Wood LLP's commercial real estate practice. Considerations For Mixed-Use Combining uses requires forethought before groundbreaking. Bob Simons

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