Wagenseller Law Firm

Mixed Used Developments: Building A Community

Real Property Section Review, Fall 2006, Vol 18, No. 2.

Can you imagine a Los Angeles in which you could walk to your market? Have you ever wondered what it would be like to walk to the neighborhood cafe or the latest nightclub? Do you remember the scene in L.A. Story where Steve Martin gets in his car to drive to his neighbor’s house about twenty feet away? Or the song entitled “Nobody Walks in L.A.?” As Los Angeles tries to steer away from the suburban model of development and planning, developers and city officials are embracing higher density developments which mix residential, commercial, entertainment and parking. As a part of the USC Gould School of Law/Los Angeles County Bar Association—Benjamin S. Crocker Symposium on Real Estate Law and Business 2006, a panel entitled “Density and Mixed Use—Walk the Walk and Talk the Talk From Entitlements Through Implementation” brought together developers and attorneys to discuss their current mixed use projects and the issues that arise in these projects.

Establishing A Framework: Governmental Efforts

While mixed use developments were theoretically possible in Los Angeles prior to 1999, in reality they were not occurring. According to Jane Blumenfeld, the Principal City Planner for the City of Los Angeles, the city began analyzing how it could facilitate mixed use developments and eliminate the barriers which were preventing the theoretical from becoming reality. The catalytic change in the government’s approach was the 1999 Adaptive Reuse Ordinance. Designed to allow the conversion of old, abandoned downtown office buildings into housing, the ordinance waived or relaxed modern zoning requirements, including parking. Once adopted, Ms. Blumenfeld noted that the city received a flood of applications for conversions under the ordinance and the results are evident to anyone who has explored the downtown housing market recently. The success of the ordinance has led to its expansion into Hollywood, Koreatown, Chinatown and a modified version which applies citywide.

The next step in the city’s plan to encourage higher density mixed-use development was the Residential Accessory Services zones (or “RAS” for those in the know). Geared toward spurring development in transportation and commercial corridors, especially along the metro lines and major boulevards, RAS zones primarily allow for increased floor area (3:1) and height (up to 50 feet) while reducing setbacks for residential or mixed use projects constructed on commercial corridors. A RAS3 zone allows for 54 units per acre while a RAS4 permits 108 units per acre. RAS zones allow ground floor retail (euphemistically labeled “neighborhood services”) and housing (either apartments or condominiums). Ms. Blumenfeld noted that retail is currently limited to the first floor of the project but planners are considering allowing additional floors of retail or other uses. A project under RAS can also be 100% residential. Open space and parking requirements remain the same.

Implementing the Theoretical: Different Concepts of Mixed Use Development

Mixed use developments give rise to a number of issues that are not as straight forward as a more traditional one-use development. The panel noted some of the issues and how they dealt with them in their projects. Those issues include how to structure a project, parking arrangements and how to build a community.

Structuring the Development: The Physical and the Legal

The initial question in a mixed use development is how to structure the project, both physically and legally to take into account the different uses. For example, should residential and retail be part of a single condominium regime of ownership? Are the residents and the shopkeepers part of the same Home Owners Association (HOA)? Do the tenants and the retail guests park in the same parking garage? Do they enter the project through the same entrance?

As to whether a mixed use project should be structured as one single condominium, Anthony Canzoneri, the Chairman of Brown, Winfield & Canzoneri and the panel moderator, thinks not. For projects encompassing significant retail, commercial, hotel and parking components, he notes that a single condominium in which retail and residential owners are members of the same HOA may not be the best framework for long term ownership and financing. Mr. Canzoneri instead suggests that an air space subdivision that creates conveyable and financeable subdivision map fee interest air space for each component is usually the better approach.

Using an example of a traditional mixed use development with ground floor retail, upper level residential and subterranean parking,Mr. Canzoneri noted that retail would typically use the first level of underground parking. Assuming that the residents used the second and third level of parking, the parking could be structured with a separate entrance, or, more likely, an easement through a portion of the upper levels.

One option is to create a single block of air space for the retail level and its parking as part of the air space subdivision map. That air space can then be conveyed, financed or leased in exactly the same way and with the same legal standing as a lot on a traditional horizontal subdivision map. The separate air space lots can all subscribe to a Reciprocal Easement Agreement. Such an agreement would govern the relationship among the different owners with respect to the operation and use of the project. Such areas typically include maintenance, insurance, support, damage, destruction, rebuilding and any joint pedestrian, vehicular or maintenance access and use areas.

Kenneth Calegari discussed Champion Development’s Gaslamp City Square in San Diego, in which 223 condominium housing units and 65,000 square feet of retail sit atop 580 subterranean parking spaces. In this project, Champion created one retail unit, which it owns along with the parking garage. Mr. Calegari, the Division President in San Diego, noted that the entire structure of the Gaslamp City Square project is owned by the HOA,mainly for insurance benefits.

While the City of West Hollywood, according to Jason Bohle Of Combined Development, Inc., is considering a mixed use ordinance, they had not yet adopted one when Combined began developing its project. Combined Properties hopes to use their development as an opportunity to show the city what could be accomplished if the city were to adopt their mixed use ordinance. The current plans for the project, at Santa Monica Blvd. and King’s Road, has ground floor retail with 3 floors of single story condominium units and one set of two floor townhouses above it. The project is a mix of one and two bedroom units and every unit has balconies facing Santa Monica Blvd or the rear landscaped portion of the building. The building will also have a residential lobby on Kings Road. As currently envisioned, the project will consist of four different air space condominiums: parking, retail, common area and residential.

In the model outlined by Mr. Canzoneri, residential “for sale” would be included in one condominium. Within this one condominium, the residential air space lots would be divided into condominium air space units (which would be depicted on a condominium plan, which Mr. Canzoneri notes should not be confused with the subdivision map). With the residential portion of their project, Combined Properties faced two challenges, both arising from the city’s affordable housing requirements. One is recovering the costs, which exceeded $500 per square foot while the space cannot be sold for more than approximately $100 per square foot. He observed that such a difference was a large loss to absorb for a relatively small project. The second issue was operational—how to best structure the condominium entity if the affordable housing is spread throughout the project.

Structuring the project with separate components can help isolate onerous or restrictive conditions, such as those arising from affordable housing mandates or redevelopment agency rules. For instance, a developer may not want to have its residential unit subject to commercial building code requirements and may not want to have retail access and Americans with Disabilities Act requirements apply to the residential component. Noting that prevailing wage requirements can add 5 to 25% of the total hard construction cost to a project, Mr. Canzoneri again encouraged separation of the part of the project receiving public assistance from the remainder of the project. Moreover, with regard to public assistance, it is important to segregate and allocate to the appropriate downstream owner the burdens, restrictions and benefits of the assistance. A developer wants to be sure that the burden applies only to the use and ownership which received the benefit.

Parking: Sharing Is A Virtue

Parking presented a challenge to all of the mixed use projects discussed. Those issues included the separation of residential parking from the retail parking while also optimizing the parking spaces so that retail parking does not sit empty at night while residential parking sits empty during the day.

Amy Forbes, a partner at Gibson,Dunn & Crutcher, LLP, outlined the competing interests she faced in working on the development of Bay Meadows Racetrack in San Mateo, California. The project encompasses over 2 million square feet of new development including a 900,000 square foot office campus, 760 single- family and multi-family housing units and a mixed use complex including a market, health club, retail, live/work and office components. The uses were mixed by zone, meaning the undeveloped land was divided into an office campus, residential zone and retail area, but none of the actual uses were mixed in with each other. For example, while the office building and the retail component were separate buildings, the space in between comprised surface parking lots. The city wanted shared parking while the retail tenants and multi-family residents insisted on reserved parking. The developer decided to grant reciprocal easements over the same parking lot to neighboring owners to reduce the amount of parking and ensure its optimum utilization. All of the parking is commonly managed.

The remaining projects, which involved both residential and retail components within one building, all involved parking within that one building. Because of the parking garage’s bond financing in Champion Development’s Collection at Downtown Burbank, Ken Calegari explained that Champion entered into two separate construction contracts so that the prevailing wage required by the bond financing was limited to the parking garage. The Collection at Downtown Burbank will include 60 live-work lofts, 58 luxury condominiums and 50,000 square feet of retail.

In Champion’s Gaslamp City Square project in San Diego, the project is attached at the parking level and the garage is owned as one unit. The parking is not a member of the HOA but the Covenants, Codes & Restrictions (CC&Rs) provide for the recoupment of maintenance from the HOA for that portion of the parking used by the residents. The residents have an exclusive use easement for the lower parking level.

Calling parking the “most difficult part of the project,” Jason Bohle of Combined Properties, Inc. explained how the economics were tight in building subterranean parking in Combined’s mixed use project in West Hollywood. The developer faced an issue in separating the retail parking from the residential parking. Similarly, for parking to meet requirements on such a small lot, Bohle wanted to take advantage of a shared use permit that would allow retail spaces to count towards residential guest parking requirements. The idea is that residential guests are most likely to need parking when demand for retail spaces is weakest. The developer also noted that to offer enough spaces many of the spaces for residents needed to be tandem. Given the tight dimensions of many infill lots, Bohle believes that tandem parking will be an increasingly common design for new urban residential units.

Mr. Canzoneri observed that we have already seen managed, stacked and valet parking for luxury condominiums in Westwood. Mr. Canzoneri also noted that the parking can be included with retail, office and/or hotel components in an air space subdivision of its own. The owner of the retail component asset could own and manage the parking garage, subject to a Reciprocal Easement Agreement with the residential component.

One option with regard to residential parking is to sell a contract right to parking, meaning that the resident has the right to park in the garage but does not own a particular parking space. Mr. Canzoneri notes that this type of structure has several benefits. First, a retail or commercial owner could theoretically maintain and manage the garage at a lower cost than a typical residential HOA. Second, this arrangement would allow for efficiency of stacked and valet parking. Third, when, for example, leaks occur, the resident is moved to a different space while the problem is fixed. This minimizes construction defect liability damages and lawsuits.

Building a Community:Can’t We All Just Live Together?

According to Ken Calegari, Champion Development looks to build communities, not just buildings. Some of the more intangible decisions to be made in a mixed use project involve creating the right mix of retail tenants and restaurants to serve the residential tenants. Champion believes strongly in amenities, including swimming pools, and quality construction for its residential units. They therefore also seek quality retail tenants that their residents are likely to visit.

Jason Bohle, Combined’s Director of Development, noted that Combined’s West Hollywood development is a part of the bigger neighborhood. As the 47 unit project is relatively small, the mixed use component would not generate enough pedestrian activity to be meaningful as a stand alone island. However, its proximity to Gelson’s across the street and the other surrounding amenities provide the base of retail stores that will allow the project to thrive as an energizing force of the neighborhood.

Moreover, Mr. Calegari of Champion Development noted that retail tenants want to be involved in association decisions relating to the property as well. Similarly, the residential tenants will want to participate to some extent in the decision making process relating to the retail portion of the complex. Part of building community in a mixed use project is giving each constituent a say in the operation and appearance of the overall project.

While each of the panelists shared burdens and obstacles which they had faced in their projects, their projects were a testament to their persistence and creativity in resolving those obstacles and serving their constituents. When you are finally able to walk to your neighborhood market or store, you will appreciate not only the convenience but the work that went into making what Tony Canzoneri calls our city’s “lost villages.”