Legal Considerations for Mixed-Use Commercial Real Estate

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By: Jeffrey M. Galkin

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 jgalkin@lgattorneys.com.

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Estimates are Opinions, Not Fact and Not Actionable

The internet has unquestionably provided unparalleled access to information to the public, both consumers and businesses, not seen since Johannes Gutenberg invented the printing press.  One such benefit of the access the internet has provided is in real estate.  Several websites now allow users to get estimates on almost every property imaginable.  Zillow is one of these websites which provides “Zestimates.” Although this knowledge can be useful to potential purchasers, some owners may take issue with these valuations.  This exact situation occurred in Patel v. Zillow, Inc.

In Patel v. Zillow, Inc., the United States Court of Appeals for the Seventh Circuit reviewed the dismissal of a lawsuit brought by homeowners who took issue with Zillow’s “Zestimate” of their property that they were trying to sell.  Before the lawsuit was filed, they learned that Zillow’s “Zestimate” of their property was below their asking price.  Zillow’s “Zestimate” listed the property at approximately $160,000 less than Plaintiffs’ listing.  Plaintiffs contended that the “Zestimate” scared away potential buyers.  Plaintiffs asked Zillow to increase the “Zestimate” or to remove them from the database.  Zillow declined.  Plaintiffs filed their lawsuit.

Plaintiffs brought suit under the Illinois Real Estate Appraiser Licensing Act contending that Zillow was appraising real estate without a license.  Plaintiff also filed claims under the Illinois Uniform Deceptive Trade Practices Act and under the Illinois Consumer Fraud and Deceptive Business Practices Act.  Plaintiffs argued that Zillow’s “Zestimate” was unfair and misleading.  The District Court (the trial court) dismissed all of Plaintiffs’ claims.

The Seventh Circuit upheld the trial court’s decision.  The Seventh Circuit noted that the Illinois Real Estate Appraiser Licensing Act did not create a cause of action for a private citizen.  More importantly, as to Plaintiffs’ claims under the Deceptive Trade Practices and Consumer Fraud Acts, the Court stated that these acts deal with statements of fact and that Zestimates are opinions, not fact.  Accordingly, where a valuation is explicitly labeled as an estimate, there is no deception.

If your business has current litigation, including claims under the Illinois Uniform Deceptive Trade Practices Act or Illinois Consumer Fraud and Deceptive Business Practices Act, or your business would like a complimentary business “check-up” to help spot any potential liability under those acts, please contact Roenan Patt. (312) 368-010;  rpatt@lgattorneys.com or any of our business attorneys.

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