Real Estate and Land Use

Proactive Predevelopment for Successful P3s

By Clayton B. Gantz

A new report was recently published by the Urban Land Institute (ULI) called Successful Public/Private Partnerships: From Principles to Practice. The report provides valuable tools and perspectives to both the public and private sectors that will assist both sectors as they work to create vibrant and successful public/private partnerships (PPPs) and builds on previous research completed by ULI in 2005 on PPPs.

Manatt real estate partner Clayton B. Gantz, Vice Chair of ULI's Public-Private Partnership Council (Gold Flight), authored or coauthored three chapters (including the one set forth below) and served on the editing committee for the piece. As an active member of ULI's Public-Private Partnership Council (Gold Flight), Stephen B. Friedman, president of SB Friedman Development Advisors, served as primary editor of this report and authored sections along with several other council members.

Municipalities can do much to lay the groundwork for successful public-private partnerships in their communities. Through effective predevelopment activities, municipalities can both attract private development to their communities and help ensure that the community's development vision is realized in a timely and efficient manner. The governmental efforts for predevelopment can help reduce risk to levels manageable by the private sector and thereby facilitate projects. Effective predevelopment activities can do much to ensure maximum value for public assets used in redevelopment. In contrast, the failure to take basic steps such as those enumerated below increases the odds of poor or even failed execution and failure to meet redevelopment objectives.

Although this section emphasizes what government can do to set the proper stage for public-private projects, it can also serve as a guide to what the private sector might expect and encourage. These predevelopment activities may result in a more publicly driven process for selecting developers, particularly where public land becomes involved. Although developers may be tempted to jump in ahead of competitors and seek to undertake many of these activities under private control, the pitfalls are substantial; encouraging public sector preparation is recommended.

Naturally, communities have used proactive predevelopment to further their public-private development objectives in many different ways, including the following nonexhaustive list:

  • Undertake market-based planning to facilitate development. Proactive planning is an effective way for communities to get things done without having to provide financial subsidy. Good planning can help drive an outcome; for example, if downtown revitalization is the goal, smart planning can ensure that the necessary ingredients (e.g., a rational, market-based mix of residential, office, and retail uses, available public transit, suitable parking, and inviting public spaces) will be in place. Good planning can also lessen the risk of project challenges and delays. For example, where a well thought-out precise zoning plan is coupled with thorough environmental review, developers who are prepared to build within the "box" created by the precise plan can often proceed without the necessity of further environmental review. The municipalities can recover the cost of these planning and environmental review activities through the imposition of development fees or assessments.
  • Build community support. Local government leaders, trusted and respected in their communities, are often more effective than private developers in building community support for a project. Through an inclusive planning process, community concerns can be identified and addressed, thus mitigating a major development risk. Building support can be a multistage process and may take some time. Many helpful techniques and processes can be built into a planning and development review process, including community workshops, stakeholder focus groups, design charrettes, web-based tools, and management of public hearings and review.
  • Assist with site assembly. Traditionally, municipalities have assisted with site assembly by using their powers of eminent domain to take private property, which in turn was conveyed to a developer for project development. The constitutionality of such takings by eminent domain for the purpose of facilitating private development was considered by the U.S. Supreme Court in the case of Kelo v. New London. Although the Kelo court upheld the constitutionality of the city of New London's takings, ironically the court's holding has had the effect of creating a widespread public and political backlash against the use of eminent domain to facilitate private development. This reaction resulted in the passage of many new state laws that at least purported to limit eminent domain rights in this setting. While legal scholars debate whether such efforts at reform were substantive or merely "window dressing," the fact is that many municipalities are extremely reluctant to exercise their eminent domain powers. Sellers reap federal tax benefits where eminent domain is used or threatened, which can be a tactical tool in site assembly.

    Although the traditional tool of eminent domain has fallen into disfavor, a municipality can still do a lot to facilitate site acquisition. For example, through the planning process, the municipality can concentrate development in areas with fewer or larger landholdings, thereby easing the developer's land acquisition task. The municipality can also sell or lease its property to facilitate site assembly, a tactic particularly practical in facilitating redevelopment of parking lots, municipal service facilities, and obsolete municipal buildings ripe for replacement.
  • Develop community infrastructure to support development. The community can provide transit, parking, utility, and other infrastructure to serve community objectives and facilitate private development. For example, public transit might be provided to mitigate increased traffic caused by increased downtown density. Similarly, structured parking might be provided to attract dense retail development. The costs of these infrastructure activities are typically recovered through user fees but may also be recovered through development impact fees or assessments, or simply the overall increased value of the redeveloped area. This strategy often requires difficult decisions to focus public investment rather than spread it throughout the community. It can often be best accomplished when linked directly to project development and recaptured through the revenues of the project itself via tax increment financing, payments in lieu of taxes, and other bootstrap techniques.
  • Undertake selective site preparation. Particularly with respect to land owned or controlled by the municipality and slated for private development, the municipality can undertake selective site preparation and remediation activities, such as moving underground utilities that affect development and allowing predevelopment entry to undertake excavation and environmental due diligence. These activities can be particularly important with contaminated sites. In some cases, public sector leadership can facilitate obtaining brownfield grants, recognizing that in many cases, the actual remediation is best undertaken as part of the redevelopment.
  • Streamline development approval processes. Streamlining entitlement and other approvals can in itself be a form of predevelopment. In many locales, the recent trend to update zoning with form-based code—or other forms of improvements—has been effective by establishing clearer parameters of acceptable development. Coordinating review and approval processes can also help facilitate both community input and moving projects forward.

By undertaking these sorts of activities, municipalities effectively reduce the risk of challenges, unforeseen conditions, and delays, thus greatly decreasing the project risk for private developers. By doing so, they effectively create an environment in which private developers can compete effectively and aggressively to pursue projects, and thus increase the returns to the community, both in terms of dollars paid for community assets and in quick and efficient realization of the desired community benefits.

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Cohousing the Next Boom for Boomers

By Michael Polentz | Elizabeth P. Levin

Today's sharing economy is "booming for boomers." According to a report released by PricewaterhouseCoopers, an estimated 7% of Americans consider themselves "providers" in the sharing economy. For Americans over 65, that number jumps to 16%. Seniors are benefiting from and providing temporary lodgings through Airbnb, ride-sharing services through Uber, and many other pooled services ranging from pet care to food delivery. Real estate developers hoping to bring the sharing economy home should turn their attention to this growing demographic of senior sharers by exploring the potential opportunities of senior cohousing developments.

The idea of shared resources in senior communities is far from new, but while the sharing once stopped at the eighteenth hole, today's seniors are interested in pooling more personal resources like in-home medical care, home maintenance, meal preparation and even kitchen space. This allows residents to reduce costs of living while benefiting from a tight-knit social community.

Traditionally, cohousing developments have been grassroots, grown from an existing group of friends or relations seeking to create their own community. As such, the legal structures governing cohousing have been largely informal or ad hoc. Notwithstanding this historical practice, developers considering jumping into the cohousing space must contemplate at the outset the legal nature of residents' relationships to the developer and to each other in order to allocate risk and rights of control among the parties. The potential legal structures to govern a senior cohousing community can be as varied as the communities themselves and often present both business and legal challenges.

The first consideration in the legal structuring of a senior cohousing community must be how much ownership residents will have over the community. On one end of the spectrum, residents can own their residence outright, echoing a familiar co-op or condominium structure, and they would therefore be able to sell it or pass it to descendants upon the residents' death. This structure, however, may result in title to the property passing to, and being owned and occupied by, non-seniors. Further, it severely limits the options for securitizing the project. On the opposite end is a "membership" structure similar to that used by the highly publicized "WeLive" project of WeWork, whereby residents pay a "membership" fee for the use of a bed, room, or residence, but do not enter into a traditional lease. This unorthodox model appears attractive to developer landlords, as it ostensibly shields the landlord from many of the traditional risks such as tenants' holding over or liability for damage, but this arrangement is untested in any court. Moreover, the current consensus of most real estate and legal experts is that, despite the claims of "membership," a court would likely treat the owner in such an arrangement as a traditional landlord, subject to all requirements of state landlord/tenant laws and regulations.

One hybrid structure that has been promoted by some developers is to place ownership of the cohousing project in an entity and allow residents to be both shareholders in and lessees from such entity. This model has the potential to give residents a stake in the ownership of their project, but eases the administrative challenges of management, financing, and transfer of resident ownership. Notwithstanding the apparent benefits, securities laws may limit the number of shareholders in the project and the transferability of those shares.

Developers looking to capitalize on the sharing economy and the aging American population need to consult thoughtful legal counsel early in the development discussion to help blaze a path (and avoid the numerous pitfalls) meeting the needs of both the developer and the potential residents in a shifting legal environment.

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