Tag Archives: Howard Weiss

Cityscape2-srp-azbigmedia2014-023

Mix Things Up

Jeff Molosnik

Jeff Molosnik

Mike Ripp

Mike Ripp

Howard Weiss

Howard Weiss

Too many cooks in the kitchen can spoil a soup, but with the right mix of experience, demand and legal advice, mixed-use developments can turn into a wildly successful, complementary group of projects.

Mixed-use developments are on the rise in Phoenix Metro as office buildings see the benefit of offering employees a place to work, shop, eat and seek entertainment in thriving community environments. To get one off the ground, though, requires a lot of collaboration and the clearing of many potential legal hurdles.

“The homeowner, the office tenant, the shopkeeper and the restaurant owner – each have concerns involving the layout, structure, location and function generally, including issues dealing with hours of operation, access (both pedestrian and vehicular), noise, security, costs, landscaping, utilities, insurance and so forth,” says James Connor, shareholder at Gallagher & Kennedy, P.A. “The various interests of the users may not always be aligned, and in fact, often may be in conflict.

“Creating the fundamental governing and controlling development agreements to serve all interests of the various users, while not undermining the value as an investment nor impeding the ability to obtain financing, is challenging,” Connor adds. “These agreements must deal with not only the development and construction periods, but of course, the indefinite life of the project for decades (if not longer) in duration.”

While drafting agreements that make everyone happy (enough) is key to the success of a mixed-use development. The financing is perhaps one of the biggest non-starters.

“Because most developers have a goal of selling the project upon realization of stabilized cash flow, care must be provided to allow for each component to be able to be defined and conveyed, in order to market parcels to the strategic investors,” Connor says. “Put another way, a REIT which invests solely in office projects will have little appetite to acquire a parcel which includes retail, residential or other uses.”

Experts note that mixed-use projects are increasingly a response to less available land for new development in dense metropolitan areas.

“What makes a given mixed-use project unique depends to a significant extent on whether you are dealing with a ‘vertical’ or a ‘horizontal’ mixed-use project, and whether the project is being developed by a single developer or multiple developers,” says Mike Ripp, an attorney at Ryley Carlock & Applewhite.

Vertical projects, he says, are the most complicated type of mixed-use development.

“The uses are more physically interdependent on each other and that components on the lower floors may need to be in use before the upper floors are complete,” he says.
“The reason these projects are becoming more popular is because people like to live, work and play all in the same area. People like having access to these types of things,” says Nussbaum, Gillis & Dinner attorney Howard Weiss.

From a consumer standpoint, mixed-use developments make life easier. That said, it’s a long journey to the “parcelization scheme” that will grab investors, developers and tenants.

“As mixed-use projects become more prevalent nationally, it is likely that standard ways of handling the more common mixed-use project issues will evolve and gain acceptance,” says Ripp.
“Some lenders find mixed-use projects difficult to evaluate because of the lack of real comparables,” Ripp says, adding that underwriting the many components of development and being able to judge whether a developer has sufficient experience all the product types are also of concern to lenders.

Every single use at CityScape was financed independently of the others. It built a hotel, occupied it and then built apartments above. Instead of phases expanding horizontally, CityScape expanded vertically.

“The idea of having to vertically finance the phasing of a mixed-use project has been one of the most complicated things we’ve had to do here,” says Jeff Moloznik, general manager of CityScape. “That part of it was far and away one of the most interesting and intricate elements of what happened,” says Moloznik of the design and engineering work as well as the financing of the CityScape phases, which happened over a seven-year span.

Additionally, Weiss points out, discrepancy between parking ratios for the different components can sometimes occur. Another issue, he says, comes to leasing. As a tenant, he says, you may not have as much control over eliminating competition — for instance, being the only sub shop in the complex. Operating expenses, too, are important to define for the respective uses.

The expenses for elevators, cleaning and janitorial services or security are not always shared by all the tenants in a mixed-use development, he adds, citing the vertical and disjointed CityScape as an example.

“There’s always an issue with the allocation of these expenses,” says Weiss.

It is easier, he says, for projects such as Kierland or Scottsdale Waterfront, which have different components in different buildings — spread horizontally. “In that type, from a legal perspective, you’ll deal with reciprocal easement (REAs) and operational agreements,” says Weiss.

That means that during development, if different components are owned or developed by separate companies, they can sign an agreement that allows for the most beneficial coexistence through contractual obligation.

“There are a lot of commercial leases out there, but at the end of the day a landlord wants a lease that specifically works with their project,” says Weiss. “Because each one has a unique component, and depending on the developer, I would say this would be handled more on a case by case basis.”

roi

ROIs on commercial properties see some uncertainty

Asking about a solid investment is a loaded question, says Certified Commercial Investment Member (CCIM) Jason Eisenberg, vice president of development and acquisitions for the Eisenberg Company.

Commercial real estate investment returns are expected to remain steady through year-end, according to a forecast released by Real Estate Research Corp. Deloitte and the National Association of Realtors. However, there are still uncertainties in that equation.

“I am still concerned that we are not seeing the job numbers where I believe they need to be in order to feel like we’re off the edge of the financial abyss,” says CCIM Alan Davidson, vice president of ORION Investment Real Estate.

“As a secondary market to Los Angeles, I’m hopeful, but not confident, we’re on a longer upward trend. The lack of growth in the housing market is particularly vexing as it has historically been a barometer of the local economy. This last recession may have permanently altered that trend.”

It’s predicted that returns on investment in commercial properties will be lower in 2014 than 2013 due to an increase in development costs as the economy rebounds.

“We have seen a dramatic increase in costs from both the land acquisition side and the materials and labor side. Rental rates have not caught up to these increases,” says Eisenberg.

There were bargains in 2013. In 2014, investors must go to smaller secondary and tertiary markets to find value.
“Bargains are scarce and often never see the light of day before sold,” Davidson says.

Depending on the quality of the asset, Eisenberg says, sellers are definitely feeling more bullish and buyers are still trying to find deals. That being said, deals are still getting done so that separation is being filled. Davidson notes that sellers are valuing properties at 2005 and 2006 levels.

“Buyers are having to contribute more equity and are concerned about paying too much in this market versus a market like Los Angeles or San Francisco, plus lenders are imposing more stringent underwriting criteria, thus dampening the ability to obtain leveraged funds with favorable terms,” Davidson says. “There’s still a gap, but one that can be bridged if both parties exhibit reasonable expectations. How much depends largely on type of property. There appears to be more interest in our market from buyers outside Arizona which is a very positive trend.”

This is something Attorney Howard Weiss, of Nussbaum Gillis & Dinner PC, has also observed.

“Over the past 24 months, there was a large influx of Canadian buyers that were mostly purchasing multi-family assets,” he says. “While there are still many Canadian buyers, the numbers have definitely decreased. I attribute this to the fact that there are less multi-family properties available, and the Canadian dollar is now weaker against the US dollar. In addition, these buyers are not seeing the low property values that initially attracted them to the Phoenix market. Some of the current Canadian buyers, however, are diversifying their portfolios by purchasing retail and office properties, including medical offices.”
Another trend Weiss noted was more sophisticated buyers, such as large institutions, entering the market.

Retail and multi-family are solid in the Phoenix market, Davidson says, adding that office has a long way to go and based on the industrial he works with, self storage, it’s a little flat.

“It all gets back to location,” Eisenberg says. “From a grocery anchored development and acquisition standpoint it will be very interesting to see what challenges and opportunities arise over the next 24 months with the Cerberus acquisition of Safeway.”

The value-add opportunities, he says, are in land. Davidson suggests looking at infill and multi-family.

“I was listening to a speaker at ICSC in Texas and he had a great quote, ‘We do not have an over-development problem, we have an under-demolition problem.’ A lot of the product out there that is deemed a value-add opportunity has little to no value except in the land,” Eiseinberg says. “The viable value-add product is all up to the relationships that the buyer has with its retailers and there are some groups in Phoenix that are doing an excellent job revitalizing old centers with new tenants.

“I see the grocery-anchored projects continue to see cap rate compression. I also see investors not seeing the returns they are needing in primary markets and turning more toward secondary and outlying markets.”

Eisenberg doesn’t see a sharp increase in interest rates in the next two to three years.

“I think there will be a modest increase as our economy finds its footing, but that will hopefully be absorbed by rental increases and higher valuations,” he says.

Davidson calls the upcoming midterms absolutely critical. “More transactions are structured as 1031 Exchanges,” Weiss says, “since there are increasing property values that result in taxable gains upon a sale.”

“There are a number of tax proposals working their way through Capitol Hill that would deliver a massive hit to the commercial real estate world, most particularly ending 1031 Exchanges,” Davidson says.

“Fiscal conservatives must obtain control of the Senate and maintain their House majority.”