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Coordination between Multiple Developers in Hotel-Oriented, Mixed-Use Transactions

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Hotel-oriented, mixed-use developments are highly complex with horizontally and vertically integrated ownership and condominium declarations to facilitate future sales, restrictive covenants to control uses, and hotel operating and condominium management agreements. When co-developers are interjected into a transaction, the level of complexity increases geometrically.

Early in negotiations, co-developers should enter into a cooperation agreement that outlines how the parties will coordinate design and construction of the mixed-use components. Unfortunately, the details of this coordination/cooperation will be very difficult to determine with certainty at this stage, given the dynamics of the development of such a complex transaction. The cooperation agreement will in many places be an ''agreement to agree'' as the parties flesh out the particulars, and the document will go through several rounds of amendments and restatements as the details become more settled. Among the issues that arise with co-developers are the following.

Plan and Construction Coordination

Particularly when the development is ''stacked'' horizontally, the construction plans for all of the mixed-use components must be highly coordinated, from architectural design to structural and systems support. The hotel architect may not be familiar with retail or apartment design issues, and the retail or apartment architect will likely have limited hotel experience. The exterior aesthetics of the hotel are critical, but the quality of construction materials for the hotel may be problematic for the apartment or retail development budget.

Mechanical systems (e.g., storm water vaults, transformer rooms, and backup generators), drive lanes, parking ramps, and other similar facilities should be shared where feasible to minimize costs and to save valuable land area. The co-developers should seriously consider hiring one architect for the entire project, or at least grant one of the architects the authority and responsibility to act as lead architect in integrating all of the plans. Sharing some of the critical engineering design firms (e.g., mechanical, electrical, plumbing, and structural) will also facilitate plan coordination. In mixed-use projects that are structurally integrated, the co-developers should also agree on one contractor for the entire project to avoid ''finger-pointing'' when construction issues arise, and one of the developers should be designated as the construction draw preparation agent, with approval rights granted to the other co-developers.

Construction Cost Sharing

Developers are typically reticent to move forward, incurring significant design and carrying costs without some comfort that the development budget is acceptable, but in a mixed-use project, the plans and budget are developed simultaneously and continuously up to the closing date and start of construction. Determining the cost sharing between the co-developers is a detailed process involving the architect, engineers, contractor, and construction representatives from the co-developers. Underground parking garages also serve as the ''platform'' for the development and contain back-of-house elements (including loading docks and mechanical systems) that serve multiple parts of the development, and frequently the co-developers will own or use differing portions of the various floors in the underground garage. Structured above-ground garages, although not serving as support for the development, may contain external walls for the various building functions, and parking spaces may be shared between the functions (such as retail or office during the day and residential at night). Determining sharing ratios for the concrete and structural support elements and shared parking spaces is more art than science.

Securing the Development Obligations

Given the interdependence of the components of the mixed-use project, each of the co-developers (and each of their lenders and equity partners) will want comfort that the other co-developers will perform their development, construction, and financing roles, particularly as land is acquired and construction commences. The cooperation agreement should contemplate the formation of an escrow funded by cash or letters of credit from each developer for their corresponding obligation to contribute to the soft and hard costs of the development that can be drawn upon in the event that a developer defaults. Without this security, the default by one developer could jeopardize the construction of the platform or common elements of the project and create cost increases for the other developers.

Maintaining the Common Elements

Mixed-use projects, by their nature, result in the sharing of roadways, mechanical systems, trash and recycling facilities, elevators, parking garage ramps, landscaping, and other ''common areas.'' The condominium declaration or separate restrictive covenants should address maintenance responsibilities and cost sharing for these common areas and, to the extent the common areas generate revenue (e.g., shared parking spaces), a method of dividing any net revenues. Alternatively, a common elements maintenance committee can be established that oversees maintenance and that drafts and enforces common area rules and regulations for the benefit of the entire mixed-use project and its various users.

About the Author

Robert H. Voelker is a shareholder of Munch Hardt Kopf & Harr’s real estate group and leads the firm's hospitality, condominium, and mixed-use practice. His emphasis is on complex development projects, including mixed-use, hotel, condominiums, apartments, retail, restaurant, and entertainment. His educational and professional background as a CPA, tax attorney, real estate attorney, real estate developer, and prior legal and business involvement with multi-faceted public/private projects with layered debt and equity financing allow for his unique ability to organize, manage, and facilitate the most complex, mixed-use projects. He recently represented W Hollywood Hotel & Condominiums and is currently working on hotel-oriented, mixed-use transactions in Dallas, Houston, Milwaukee, New Orleans, and Mexico. Robert received his Juris Doctor, graduating magna cum laude, from Southern Methodist University Dedman School of Law in 1984, where he was the tax editor of the Southwestern Law Journal and was inducted into the Order of the Coif. He obtained his Bachelor’s of Business Administration in Accounting, graduating magna cum laude, from Southern Methodist University in 1980. Bob is an avid writer and speaker in the areas in which he practices.
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