Urban Development Requires Extra Resourcefulness

By Jeff Bennett

Urban growth boundaries are complicated critters. As time marches on, with the exception of periphery development, there simply are fewer and fewer lots to develop. This leaves those who choose to develop near the urban core with three basic options: develop physically challenging lots, redevelop tired sites and/or buildings, or assemble smaller lots to accommodate larger redevelopment. This leaves developers in a position where "due diligence" involved with site acquisition has become much more than following a simple checklist.

Developers face four key issues when tackling these types of development:

• Financing challenges;
• Dealing with ailing or non-existent infrastructure;
• City willingness to accommodate "new" uses in existing zones; and
• Dealing with special interest groups.

Finance Challenges — Educating the Lender

Most loan underwriters prefer financing projects that fit within previously tested parameters. Those projects can be analyzed quickly, the unknowns are limited, and the value of the security taken is measurable. In other words, approving the loan is a calculated, but relatively safe bet. Out-of-the-box projects and many urban redevelopment projects simply don't fit this formula. So, developers have learned to adapt.

First and foremost, developers have learned to do a better job educating the lender very early in the process concerning project risk factors and how they will be addressed. The project idea and business parameters are discussed openly; comprehensive information about the surrounding area, new development patterns, and property value trends are provided; exhaustive environmental analysis is completed, solutions are identified, and remediation costs are accommodated. The developer also presents a project economic analysis and the potential project hurdles (political, regulatory, and financial) are disclosed with a plan for addressing them.

As a practical matter, this requires that the developer must now comprehensively analyze at a very early stage of a project many factors that in a "typical" development deal would be "givens." The consequence is that today's developer faces more up-front work and cost, and more time is expended before the he/she knows whether project financing will be there. The cost of that financing impacts the bottom line. The payoff is that project risk is a known quantity earlier in the process.

A second way developers have adapted is by providing a more significant financial commitment. This can manifest itself in many ways: more equity, higher percentages of pre-sale or pre-leasing, acceptance of a shorter loan payoff term, higher interest rates, or structuring the deal as a recourse loan. Any one or (more commonly) some combination of these approaches tends to ease a lender's concern of the unknown.

Infrastructure Costs

For all but the smallest projects, land re-development raises immediate infrastructure adequacy issues because the new use typically differs, sometimes dramatically, from the previous use. This is particularly so in areas zoned for employment or commercial development, because previously installed infrastructure (e.g., sanitary sewer, water and power lines, and streets and intersections) was designed and constructed to accommodate a much lower level of service than will be needed for the new development. These systems are often inadequate, and likely to be at or near the end of their useful life. The result is that costly infrastructure updates may be imposed as a condition of approving the project. If either of the foregoing scenarios is present, the developer will need to address the inadequacy, and the cost and time loss associated with it, before moving forward.

To address these issues, the sophisticated developer needs to fully understand the status of a city's capital improvement and transportation system plans, how infrastructure projects get included, how the city decides which projects receive public dollars, and when they will be built. If the city is not prepared to solve the challenges, a developer may be required to pay for part or all of the solution. That, of course, presents another complication for project financing that needs to be known sooner rather than later.

Governmental Flexibility

Many urban infill and redevelopment projects require the cooperation of City Hall and its various agencies. This can come in the form of regulatory flexibility, intervention with special interest groups, financial commitments, and the assertion of plain old political will.

Some cities proactively support this work. They already have adopted changes to zoning and environmental regulations that allow a fairly broad range of flexibility for land located in areas that are identified and ripe for redevelopment. Some cities respond to projects in a rather ad hoc but effective way, particularly if important economic development goals can be achieved with a specific project. Other jurisdictions are not accommodating at all. The jurisdictions that are not or cannot be adaptable will lose redevelopment opportunities.

Now, perhaps more than ever, developers must thoroughly understand the political environment in which they find themselves — and how to change it if need be.

Well-Informed Special Interest Groups Have Power

A practical reality of infill development, redevelopment, and land assembly projects is dealing with the community in which the property is located. These communities have established identities and long-term citizens and businesses that can be adversely affected by even a relatively small project. They do not like surprises and may not support developers who are (or appear to be) insensitive to the impacts a project can have on their community. These communities are often well-funded. That is code for "we'll appeal a decision we think is not in the community's best interest." Accordingly, these projects garner an unusually large volume of attention and nearly microscopic examination.

Because of these dynamics, developers should size up community issues early. To do this effectively, the developer needs to establish and maintain open lines of communication with city staffers, official community representatives, and community businesses. Neighborhood open houses, where schematic project ideas are floated by the developer and where community input is genuinely sought by the developer, are important.

This approach, however, is not without risk. It can unintentionally empower a community to address issues that are not based in the regulations that apply to project approval. Treading the line between developing to code and developing to neighborhood desire can be dangerous. This risk, however, usually can be managed if the developer's motivation in engaging in this community-based process is genuine. In my experience, community groups are reasonable to deal with if they are dealt with reasonably from the beginning.

At the end of the day these projects will still get built and succeed. However, that will not happen without purposeful and additional effort from the developer and all others who have a stake in these projects. The rules of the game have changed and those who adapt to those changes will come out on top.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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