Canada: Mixed Use Developments

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Hospitality & Tourism, May 2008

A Sense of Place

A sense of place, a desire for community, the returning lustre of vibrant city centres — these are all reasons given for the popularity of mixed use developments, a place to live and work and play.

Mixed use developments reflect a response to urban sprawl, as well as a response to how to maximize economic returns on the high cost of land, particularly in city centres. A mixed use project can take many forms. Horizontal developments, such as "Main Street" town centres may include townhomes, apartments and retail. Vertical mixed use projects are popular for hotel development and may include residential condominiums, shopping, restaurants and entertainment.

For the hotel operator or owner, a mixed use project may have many advantages over a single purpose hotel. The synergies of being located in a project with residential homes, entertainment and shopping may provide a high level of foot traffic and economic activity for the hotel. The potential challenge is that the other uses in the project not compete against the economic activity of the hotel, such as the hotel restaurant and bar, the hotel spa, coffee shop and newsstand, for example.

For the developer, the benefit of higher densities and an increased return on land costs is weighted against the complexities of developing and constructing a mixed use project.

Structuring a Mixed Use Project

The legal structure of a mixed use development is governed by provincial legislation and municipal by-laws. Accordingly, which province or, for that matter, in which municipality a project is located, will have an impact on how the project is structured. Generally speaking, the project will consist of various separate legal elements, which are created by legal subdivision — either by way of condominium legislation (or strata, as it is known in British Columbia) or by way of air space subdivision. Although condominium or strata legislation is generally well advanced in North America, the sophistication of the law governing air space subdivision varies greatly among jurisdictions.

The knowledge and experience of the parties that may be involved in implementing such a legal structure also varies widely. For example, the City of Vancouver has approved approximately 100 air space subdivisions since legislation was enacted in 1971. Twenty-seven of those approvals have been granted in the past four years. The increasing number of recent approvals is indicative of the popularity of mixed use developments, particularly in the hospitality and tourism sector.

The complexities and intricacies of obtaining zoning, development and subdivision approvals, and creating a building and project, the various elements of which are, on the one hand, interdependent but, on the other, potentially in conflict with each other, require that the entire team be brought together as early in the development as possible — the developer, architects, city planners, surveyors, lawyers, engineers, tenants and operators, among others.

The legal structure of a mixed use development is important for many reasons. It creates the flexibility to potentially phase construction, to allow for the various elements to be marketed, sold and financed separately and perhaps most importantly, to be operated and governed independently from each other element of the project.

Operating a Mixed Use Project — Master/Reciprocal Easement Agreements (Conditions, Covenants and Restrictions)

The interdependence of the physical structure versus the requirement for independence between the various uses of a mixed use project requires comprehensive agreements that address all of the mutual concerns between the differing elements of the project. These issues are typically addressed in master agreements or reciprocal easement agreements. In the United States, these type of agreements are typically set out in the conditions, covenants and restrictions (the CC&Rs). The complexity of these agreements is driven by the complexity of the project.

The following are some of the issues that may be dealt with in the master agreements or the CC&Rs:

  • Reciprocal easements pedestrian and vehicular access, utility conduits, vertical access, i.e., elevators, escalators and stairwells

  • Structural support for example, for the condominium residences located in the air space parcel/condominium located above the freehold hotel

  • Parking ownership, paid or valet parking, security, exclusive vs. non-exclusive areas, nested parking areas, management

  • The use of shared or common facilities and the sharing of costs fitness facilities, spas, lobbies, parking, driveways, walkways

  • Other use issues such as loading docks and delivery times, trash facilities, controls over noise and provision of natural light and views

  • Construction phasing and staging and crane swing arrangements

  • Ongoing maintenance and repair obligations

  • Rights regarding alterations, construction and renovation

  • Architectural control and design guidelines

  • Insurance and casualty requirements (owners, operators and lenders may have different expectations for the disposition of insurance proceeds. In a mixed use project, the interdependence of the physical structure may require that certain portions of the building must be rebuilt in order to allow other uses to continue to operate).

Worth the Effort?

There are a myriad of legal and related issues to consider and resolve in order to develop a successful mixed use project. Financing, sales, leasing and marketing objectives may not be achieved if these issues are not dealt with appropriately. However, when all the fundamentals are understood and dealt with and the objectives achieved, a successful, mixed use project adds character and life to a community, creates an economic marketplace for the commercial users and occupiers and can be an innovative and profitable venture for the owner/developer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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