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Mixed Use Developments: Building A Community

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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?

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?

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  • 1. Volume 18, No. 2 Fall 2006 REAL PROPERTY SECTION REVIEWLos Angeles County Bar Association Highlights of this Issue Trends in Real Estate: An Economic Forecast for the Market . . . . . . . . . . . . . . . . . 1 Mixed Use Developments: Building a Community . . . . . . . . . . . . . . . . . . . . . . . . 3 Financing Today’s Deals: Issues Concerning TICs, Defeasance Options and more . 5 Give and Take: The Impact of Condemnation, Redevelopment and . . . . . . . . . . . 8 What Happens When the Lights Go Out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Workouts: The Next Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Real Estate Joint Ventures and Preferred Equity Investments . . . . . . . . . . . . . . . . 12 Serving Multiple Masters: Can One Attorney Represent All Parties. . . . . . . . . . . . 13 continued on page 2 O n April 19,2006,Stan Ross of the USC Lusk Center for Real Estate opened the 2006 Crocker Symposium with an overview of the real estate market. Stan Ross is Chairman and Senior Fellow of the Lusk Center and plays an active role with the Urban Land Institute. Although not part of the pro- gram,attorneys new to a real estate practice may be interested in Stan’s new book,TheInsideTrack to Careers in Real Estate, which is published by ULI.1 Stan has an accounting background, but he provided a thorough economic forecast for Crocker attendees,based in large part on research of the Lusk Center. The following is a sum- mary of his economic forecast, as presented in the Crocker Symposium Introductory Session, Overview of the Real Estate Market: Where We Are and Where We’ll Be. L O S A N G E L E S C O U N T Y B A R A S S O C I A T I O N Benjamin S. Crocker Symposium on Real Estate Law and Business 2006 Economic Forecast National Economy. In line with the fore- cast of the Federal Reserve, the Lusk Center predicts that the national economy will continue a strong rate of GDP growth throughout 2006 and into 2007.2 Similarly, job growth will con- tinue in across sectors and unemployment will remain low. The hourly pay of production work- ers is rising at a particularly fast pace, which, combined with steep oil prices,raises some infla- tionary concerns. A practitioner is well-advised to monitor consumer spending as a key indica- tor of things to come. California Economy. The Southern California economy is more diversified and employment rates are recovering at a faster rate than in the nation overall. Substantial interna- tional trade is a major factor in California’s cur- rent economic climate. Los Angeles County is particularly well-diversified by industry. This is significant because the local economic down- Message From the Editor This Fall 2006 issue of the Real Property Section Review includes valuable information presented at the Benjamin S. Crocker Symposium. We believe the information summarized by the following articles written by our volunteer Reporters is something that should be shared with the entire Real Property Section. We hope you enjoy reading this month’s Review. —Daniel L. Goodkin, Esq. dgoodkin@goodkinlynch.com Trends In Real Estate: An Economic Forecast For The Market 2 3.5 percent GDP growth is expected. 1 The Young Leaders Group of ULI Los Angeles is hosting a related career program on the evening of May 31, 2006. Attendees will receive a copy of The Inside Track to Careers in Real Estate and the oppor- tunity to participate in a discussion with Mr. Ross and other industry leaders.
  • 2. Volume 18, No. 2 Fall 2006 REAL PROPERTY SECTION REVIEWLos Angeles County Bar Association Highlights of this Issue Trends in Real Estate: An Economic Forecast for the Market . . . . . . . . . . . . . . . . . 1 Mixed Use Developments: Building a Community . . . . . . . . . . . . . . . . . . . . . . . . 3 Financing Today’s Deals: Issues Concerning TICs, Defeasance Options and more . 5 Give and Take: The Impact of Condemnation, Redevelopment and . . . . . . . . . . . 8 What Happens When the Lights Go Out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Workouts: The Next Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Real Estate Joint Ventures and Preferred Equity Investments . . . . . . . . . . . . . . . . 12 Serving Multiple Masters: Can One Attorney Represent All Parties. . . . . . . . . . . . 13 continued on page 2 O n April 19,2006,Stan Ross of the USC Lusk Center for Real Estate opened the 2006 Crocker Symposium with an overview of the real estate market. Stan Ross is Chairman and Senior Fellow of the Lusk Center and plays an active role with the Urban Land Institute. Although not part of the pro- gram,attorneys new to a real estate practice may be interested in Stan’s new book,TheInsideTrack to Careers in Real Estate, which is published by ULI.1 Stan has an accounting background, but he provided a thorough economic forecast for Crocker attendees,based in large part on research of the Lusk Center. The following is a sum- mary of his economic forecast, as presented in the Crocker Symposium Introductory Session, Overview of the Real Estate Market: Where We Are and Where We’ll Be. L O S A N G E L E S C O U N T Y B A R A S S O C I A T I O N Benjamin S. Crocker Symposium on Real Estate Law and Business 2006 Economic Forecast National Economy. In line with the fore- cast of the Federal Reserve, the Lusk Center predicts that the national economy will continue a strong rate of GDP growth throughout 2006 and into 2007.2 Similarly, job growth will con- tinue in across sectors and unemployment will remain low. The hourly pay of production work- ers is rising at a particularly fast pace, which, combined with steep oil prices,raises some infla- tionary concerns. A practitioner is well-advised to monitor consumer spending as a key indica- tor of things to come. California Economy. The Southern California economy is more diversified and employment rates are recovering at a faster rate than in the nation overall. Substantial interna- tional trade is a major factor in California’s cur- rent economic climate. Los Angeles County is particularly well-diversified by industry. This is significant because the local economic down- Message From the Editor This Fall 2006 issue of the Real Property Section Review includes valuable information presented at the Benjamin S. Crocker Symposium. We believe the information summarized by the following articles written by our volunteer Reporters is something that should be shared with the entire Real Property Section. We hope you enjoy reading this month’s Review. —Daniel L. Goodkin, Esq. dgoodkin@goodkinlynch.com Trends In Real Estate: An Economic Forecast For The Market 2 3.5 percent GDP growth is expected. 1 The Young Leaders Group of ULI Los Angeles is hosting a related career program on the evening of May 31, 2006. Attendees will receive a copy of The Inside Track to Careers in Real Estate and the oppor- tunity to participate in a discussion with Mr. Ross and other industry leaders.
  • 3. 3 Real Property Section R e v i e w C an 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 sub- urban 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 andTalk theTalk FromEntitlementsThroughImplementation” 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 the- oretically 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 ana- lyzing how it could facilitate mixed use devel- opments and eliminate the barriers which were preventing the theoretical from becoming real- ity. 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 park- ing. Once adopted,Ms.Blumenfeld noted that the city received a flood of applications for con- versions under the ordinance and the results are evident to anyone who has explored the down- town housing market recently. The success of the ordinance has led to its expansion into Hollywood,Koreatown,Chinatown and a mod- ified version which applies citywide. The next step in the city’s plan to encour- age higher density mixed-use development was the ResidentialAccessoryServices 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 commer- cial 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 serv- ices”) and housing (either apartments or con- dominiums). Ms. Blumenfeld noted that retail is currently limited to the first floor of the proj- ect but planners are considering allowing addi- tional floors of retail or other uses. A project under RAS can also be 100% residential. Open space and parking requirements remain the same. Implementing theTheoretical: Different Concepts of Mixed Use Development Mixed use developments give rise to a num- ber 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 devel- opment 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 shop- keepers 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 modera- tor, thinks not. For projects encompassing sig- nificant retail, commercial, hotel and parking components,he notes that a single condominium in which retail and residential owners are mem- bers of the same HOA may not be the best framework for long term ownership and financ- ing. 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 sub- division map. The separate air space lots can all subscribe to a Reciprocal Easement Agreement. Such an agreement would govern the relation- ship 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 proj- ect, 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 CitySquare project is owned by the HOA,mainly for insurance benefits. While the City ofWest Hollywood,accord- ing 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 opportu- nity to show the city what could be accomplished if the city were to adopt their mixed use ordi- nance. 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 res- idential lobby on Kings Road. As currently envi- sioned, the project will consist of four different air space condominiums: parking, retail, com- mon area and residential. Mixed Use Developments: Building A Community By Laine T.Wagenseller,Wagenseller Law Firm continued on page 4
  • 4. 4 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 por- tion of their project,Combined Properties faced two challenges, both arising from the city’s affordable housing requirements. One is recov- ering 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 sec- ond issue was operational—how to best struc- ture the condominium entity if the affordable housing is spread throughout the project. Structuring the project with separate com- ponents can help isolate onerous or restrictive conditions, such as those arising from afford- able housing mandates or redevelopment agency rules. For instance, a developer may not want to have its residential unit subject to commer- cial building code requirements and may not want to have retail access and Americans with Disabilities Act requirements apply to the res- idential 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 own- ership 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 inter- ests she faced in working on the development of Bay Meadows Racetrack in San Mateo, California. The project encompasses over 2 mil- lion square feet of new development including a 900,000 square foot office campus, 760 sin- gle-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 unde- veloped 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 ten- ants and multi-family residents insisted on reserved parking. The developer decided to grant reciprocal easements over the same park- ing lot to neighboring owners to reduce the amount of parking and ensure its optimum uti- lization. All of the parking is commonly man- aged. 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 sep- arate construction contracts so that the prevail- ing 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 proj- ect 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 main- tenance 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 residen- tial 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 res- idential guest parking requirements. The idea is that residential guests are most likely to need parking when demand for retail spaces is weak- est. The developer also noted that to offer enough spaces many of the spaces for residents needed to be tandem. Given the tight dimen- sions of many infill lots,Bohle believes that tan- dem parking will be an increasingly common design for new urban residential units. Mr. Canzoneri observed that we have already seen managed, stacked and valet park- ing for luxury condominiums in Westwood. Mr. Canzoneri also noted that the parking can be included with retail, office and/or hotel com- ponents 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 res- idential component. One option with regard to residential park- ing is to sell a contract right to parking, mean- ing 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 arrange- ment 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 con- struction defect liability damages and lawsuits. Building a Community:Can’t We All Just LiveTogether? 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,includ- ing 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 rela- tively 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 neighbor- hood. Moreover, Mr. Calegari of Champion Development noted that retail tenants want to be involved in association decisions relating to Mixed Use Developments: Building A Community continued from page 3 continued on page 5
  • 5. 5 Real Property Section R e v i e w 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 appear- ance of the overall project. While each of the panelists shared burdens and obstacles which they had faced in their proj- ects,their projects were a testament to their per- sistence and creativity in resolving those obstacles and serving their constituents. When you are finally able to walk to your neighborhood mar- ket or store, you will appreciate not only the convenience but the work that went into mak- ing what Tony Canzoneri calls our city’s “lost villages.” Laine T. Wagenseller is the founder of Wagenseller Law Firm,a full service business and real estate law firm in downtown Los Angeles. The firm represents real estate developers, business and property owners, and investors. For more information visit www.wagensellerlaw.com or contact Mr. Wagenseller at (213) 996-8338. Financing Today’s Deals: Issues Concerning TICs, Defeasance Options, Interest Rate Hedging and Ground Leases By: James D.Hearn,Esq.1 O n April 19,2006 the USC Gould School of Law, in association with the Los Angeles County Bar Association, pre- sented the 2006 Benjamin S. Crocker Symposium on Real Estate Law and Business at the Millennium Biltmore Hotel in down- town Los Angeles. The Symposium opened with an introductory session providing an overview of the current real estate market. This was followed by a plenary session discussing retail real estate transactions. Following the introduction and plenary session, which were addressed to all attendees, the presentations were divided into three topics tracks: Capital, Development and Deal-Making Essentials. The first breakout session on the Deal- Making EssentialsTrack was entitled Financing Today’s Deals: Issues and Strategies Concerning TICs,Defeasance Options,Interest Rate Hedging and Ground Leases. This session was moder- ated by Greg J.Loubier,Esq.,a real estate part- ner in the Los Angeles office of Allen Matkins Leck Gamble & Mallory LLP. Joining Mr. Loubier were three panelists: Douglas E. Lahammer, Esq., a partner in the real estate department of Pircher, Nichols & Meeks, Los Angeles; Dawn M. Reinhardt, Esq., a Deal Manager with Commercial Defeasance, LLP based in Charlotte, North Carolina; and, Jason M.Hoffnagle,a Client Relations Manager with Chatham Financial Corporation located in Denver, Colorado. 1. Financing Tenancies in Common: This topic was discussed by Mr. Lahammer. He explained that lenders are responding to market demands for the financing of real property held by multiple owners as tenants- in-common.2 Although this method of holding title to real property has existed for centuries, it has not, until recently, been used with any frequency in connection with commercial finance transactions. The current upsurge in demand for such financing is, for the most part, tax driven. Specifically, tenancies-in-common are now being used in connection with so called “like-kind” exchanges under Section 1031 of the Internal Revenue Code (the “Code”).3 Section 1031 permits a taxpayer to defer the recognition of gain upon the exchange of property held for productive use in connection with a trade or business or for investment to the extent that it is exchanged solely for property of a “like-kind” which is also held either for productive use in a trade or business or for investment. Section 1031 is most commonly associated with real estate exchanges. Real property with multiple owners is generally held in entity form (i.e., partnerships, limited liability companies or corporations). This ownership structure can present a barrier to exchange treatment. This is due to the fact that even if the sole asset of the entity is real estate, the interest holders, for the purposes of Section 1031, are deemed to hold interests in the entity and not in the underlying asset of the entity (i.e., the real estate). Thus, entity interests do not qualify for exchange treatment. For a successful exchange there must exist direct ownership of the acquired real estate by the exchanging party following the exchange. Unlike partnership and other entity interests, tenancy-in-common interests represent a form of direct ownership in real property and, as such, may qualify for exchange treatment. A TIC is not an entity. Rather, it is a method of holding title to real property wherein multiple parties each own a direct, undivided interest (generally expressed as a percentage) in the underlying property. As such, a TIC may be used by parties coming out of an exchange transaction. It permits the taxpayer to take title (i.e., direct ownership) in the same manner as they held the property relinquished in the exchange transaction. Over the past several years TIC “sponsors” have acquired large commercial properties and offered TIC interests to multiple parties completing exchange transactions. As stated, indirect interests in real property are not eligible for exchange treatment. For instance, interests in a partnership will not qualify as like-kind property. Until 2002, even interests held in real property as a tenant-in-common were potentially subject to attack by the Internal Revenue Service (‘IRS”) as constituting a de facto partnership. The uncertainty was compounded by the fact that in 2000 the IRS explicitly prohibited the issuance of advance rulings on the tax treatment of TICs.4 1 James D. Hearn, Esq., M.A., J.D., LL.M. is a partner at Corleto, Ackerman & Hearn LLP in Encino, California, with a practice focusing on real estate, finance and taxation. 2 The terms TIC and/or TICs are used interchangeably to refer to the manner of holding title, tenancy-in-common, and to the interest holders, tenants-in-common. 3 Included in the program materials provided by Mr. Lahammer is Jon S. Robins’ article entitled Financing Tenants in Common Property in Capital Markets, The Real Estate Finance Journal, Summer 2002, which provides a valuable outline on this topic. Also provided was, CMBS: Tenants- in-Common Becoming More Common, Moody’s Investors Service, August 18, 2003. continued on page 6 Mixed Use Developments: Building A Community continued from page 4 4 Revenue Procedure 2000-46, 2000-2 CB 438.

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