The Covid-19 pandemic resulted in seismic shifts in the way people work, live, shop and engage in recreational activities. While technological progress over the past several years started these trends, the pandemic accelerated the pace. The impact technological progress has had on commercial real estate use and development has been dramatic. It is unlikely that real estate developers will be building large regional shopping centers anchored by national department store tenants or building new downtown office buildings any time soon. These types of uses for commercial real estate are not what businesses and consumers demand. Instead, developers are focusing on mixed-use projects that combine complementary uses. While mixed-use developments are hardly a novel concept, developers are finding that multiple uses are desirable and are amenable to securing municipal approvals and assuring a greater likelihood of financial success.
Mixed-use developments can be challenging to structure from both an economic and legal perspective. A developer that has focused on apartment buildings or retail properties may not have the experience or personnel necessary to successfully design, build, or market distinctly different properties. As such, it is common to find commercial developers specializing in different sectors working together to develop or redevelop projects that serve distinctive markets. For example, it can be in the form of a single building which combines distinct residential, retail and hotel uses, or a residential building that is part of a retail development providing amenities such as grocery stores and entertainment venues.
From start to finish, a mixed-use development can require a long timeline, as developers will need to procure governmental approvals and zoning modifications as well as financial inducements such as tax increment financing. Creating an ownership and operational structure to govern multiple uses and multiple owners can be challenging from a legal perspective. There is no “standard,” one-size-fits-all ownership structure. Just as all property is unique, every mixed-use project has unique features, whether it be the result of design, use or location.
Dividing a project based on distinct uses and owners subjects a mixed-used project to a number of legal requirements. Aside from zoning, projects may need to sub-divided into separate properties, owner associations will need to be formed, and various legal documents such as condominium declarations and cross-easement/operating agreements will need to be recorded in order to govern future ownership and operation of the project.
To create the governing instruments and project structure, a developer must consider numerous factors relating to the physical layout and operational requirements of the project. Some of the major considerations are as follows:
- Structural Elements – If commercial and residential portions of the development are located in the same building and those portions of the development are separately owned, shared structural elements such as roof systems, foundations and exterior walls will be located on one ownership group’s portion of the building. This arrangement will require cross-easement agreements governing the rights and responsibilities of the different ownership groups in the building.
- Mechanical and Utility Facilities – As with structural elements, an integrated structure will often require different ownership groups to share common building systems such as HVAC, elevators or plumbing. In addition to cross-easements, defined operating standards may be desirable as different units will have distinct demands for these facilities.
- Building Services – Services such as security, trash removal, loading docks, common entrances, snow removal and landscaping may be shared among the owners. Responsibility for the operation of these facilities and services must be clearly defined.
- Use Restrictions and Alterations – Use restrictions may be necessary to insure harmonious ownership and operation of mixed-use developments. Although a given use may be permissible under applicable zoning laws, voluntary limits on certain commercial uses may be desirable for neighboring residential owners, e.g., uses such as prohibitions on night-clubs, theaters, liquor stores or cannabis dispensaries, and 24-hour convenience stores. Similarly, limitations on exterior alterations and signage required by one set of owners may be undesirable to neighboring owners, e.g., the proverbial flashing neon sign.
- Management and Control – It will be necessary to assign management responsibility for particular project elements and to define the scope of approval rights vested in the non-managing owners.
- Cost Sharing/Assessments – Careful consideration must be given to the method of allocating costs among different owners for building services and common expenses due to possible disproportionate usage. Allocating too much cost to one set of owners could lead to disproportionate assessments between groups.
Careful consideration of these factors and thoughtful legal documentation will help developers and future owners successfully create and operate a mixed-use development. Given the uniqueness of each project and the possible complexities that it may create, the only “standard” rule is to start planning early.
Should you require any additional information regarding commercial real estate development or the ownership and operation of commercial properties, please contact Jeffrey M. Galkin at 312-368-0100 or firstname.lastname@example.org.
John, Alexandria, Mary, Martin, and Yvette, formed the Jammy Sleepwear Company over thirty-five (35) years ago. They were equal partners and formed a corporation. On the advice of their attorneys, the entered into a shareholders’ agreement that contained buy-sell provisions. This type of agreement is sometimes referred to as a “buy-sell agreement”.
Their buy-sell agreement contained various provisions, including under what circumstances a departing shareholder’s shares would be purchased, what the purchase price of those shares would be, and the terms of payment. Since the business was in its infancy, they agreed it would be valued at its “book value”, meaning that the value of the assets on its financial statements, less all obligations, would be the business’s value. There was no adjustment for good will or other intangible assets. Also, the increase in value of any assets would not be taken into consideration. The purchase price to a departing shareholder was to be paid in twelve (12) months, in equal monthly payments. The business was required to purchase a departing shareholders shares.
Since they formed the business in 1980, they acquired other businesses and purchased real estate through a separate LLC. They did not think to have a buy-sell for the LLC.
John has announced he would like to retire, but he has objected to the purchase price as being “unfairly” low. He has advised the other owners that he will keep his interest in the real estate, since it will provide him with a “good stipend” during his retirement. Shortly thereafter, Mary announced her retirement.
The remaining owners are concerned that the business will not be able to support payments to John and to Mary. Also, the remaining owners would prefer that John and Mary also sell their interests in the LLC.
Unfortunately, the shareholders (and LLC members) did not regularly review their buy-sell agreement. As the value of the business grew, the amount of the payments increased and would put a strain on the cash flow of the business. If more than one owner were to retire, it would cause a bigger strain. Either the business would have to borrow money, the owners would have to make capital infusions, new investors would be needed, or the business would need to be sold.
Some buy-sell agreements address these types of situations, by limiting the amounts that must be paid out to departing owners on an annual basis. For example, the payments cannot exceed a specific dollar amount or a percentage of gross profits. Also, when the owners buy real estate to be used by the business, they might consider including the real estate as a part of the buy-sell process.
Buy-sell agreements should be reviewed periodically to ensure they continue to meet the needs of the business and its owners. Levin Ginsburg has been advising business owners regarding legal aspects of their businesses, including buy-sell agreements for almost forty years.
Please contact us with any questions you have regarding your business (including any buy-sell issues) at 312-368-0100 or Morris Saunders at email@example.com.
February 17, 2018 is fast approaching. Anyone who is anyone in the toy industry will be at Javits Convention Center showcasing the latest and greatest in toy innovation. All businesses in the toy industry are putting the final touches on their displays and their presentations. Is a meeting with the company’s lawyer on the pre-show checklist? If not, why not?
Consulting with the Company’s lawyer may save a company tens, even hundreds of thousands of dollars. The following is a short discussion of some of the items that should be on every toy company’s “To-Do” list prior to attending Day One of the New York Toy Fair.
- Intellectual Property.
At the very least, the company should consider applying for a trademark registration for the name of the company and its products. Unfortunately, the number one thing most companies forget or ignore until there is a legal battle ensuing is to properly protect the Company’s intellectual property, such as its name and the names of its products. Trademarks for product names are fairly inexpensive to search and protect, and yet, may cost a company dearly if those names were to become the subject of a cease and desist letter and resulting federal court infringement litigation. We defended a toy manufacturer in a trademark infringement lawsuit that allegedly infringed a competitor’s trademark. After two years and in excess of $50,000 in legal fees (pretty inexpensive in trademark dispute litigation) the matter was resolved. Consulting with counsel and filing the appropriate trademark applications could have avoided the huge waste of time and expense.
Another form of legal protection often overlooked is copyright for the toy’s design. If the design meets the requirements of a sculptural work, such as a plush toy design, then copyright can be a powerful tool in locking out your competition from the use of designs that are “substantially similar”. Prior to any trade show, toy companies must identify and protect its intellectual property, or risk the very goodwill of the company. Intellectual property can give a company significant value.
- Privacy and Security.
Toy companies, like all companies, must take steps to protect the data of the company, minimize the risk of a breach, and put in place technological and legal measures designed to decrease liability in the event a breach does occur. A comprehensive privacy program including but not limited to updated privacy notices, terms and conditions, internal policies, incident response plans and insurance coverage all geared toward reducing risk of legal liability is imperative if the company is to survive. If the toys being showcased are “smart” or “connected” toys, privacy and security issues involving the Internet of Things will be at the forefront of manufacturers’, retailers’, and consumers’ minds. Retailers seeking to avoid liability undoubtedly will have questions as to how the software works, what, if any, personally identifiable data is collected, how is it being stored, retained and destroyed. Additionally, if a third party vendor will be used to provide software for a smart or connected toy, the company must seek counsel knowledgeable in privacy and security in order to reduce legal risk to the company that may result from the use of such software.
- Labeling / Advertising.
Federal law requires product packaging and certain advertisements for toys and games intended for use by children 12 years of age and under to display cautionary statements regarding choking and other hazards. Safety related labeling and advertising for toys generally depends upon the category of toy and the age of the child for which the toy is intended. It is imperative that toy companies be familiar with these laws and engage counsel who is familiar.
For more information, please contact:
(312) 368-0100 or firstname.lastname@example.org.