Skip navigation
Retail Traffic

Stuck in the Middle

Developers are likely to have less control over urban in-fill projects than more traditional suburban projects. Instead of buying property with no strings attached, they are more likely to ground-lease property from public or private entities or enter into disposition and development agreements with redevelopment agencies. The controlling party often insists on approving the developer, the scope of the development, and many of its use and operational characteristics.

Not always immediately obvious is the impact these constraints may have on important third-party participants in the development process. These third parties often have the leverage to insist that transactions be structured and documented on their own forms and that they accept only customary risks. Since the controlling parties are also frequently institutions with their own preferred forms and procedures, the developer can find itself stuck in the middle of a battle of the titans, suffering the wounds of lengthy delays, additional liabilities and, ultimately, loss of income. Some planning during the negotiation of the underlying documents can mitigate many of the problems.

Transferability Constraints The underlying documents should set forth the term of the transferability constraints. They should also recognize the potential need for the developer to transfer to affiliated entities, to bring in partners/members, and to sell or ground-lease portions of the project to anchors without the controlling party's approval. If the developer's obligations are substantially diminished at some point during the development process (even though use and operational constraints may continue), transfer approval requirements can be eliminated or replaced by more objective requirements based upon the experience and reputation of the replacement developer.

Even during the construction process, the developer should attempt to preserve the right to add partners/members or assign to another entity without approval, provided the developer itself remains directly or indirectly controlled by the appropriate individuals or entities. Developers should also preserve the right to convey portions of the project without the controlling party's approval, not only to identified anchors, but also to substitutes meeting designated criteria.

Construction Constraints The underlying documents frequently require that the developer's obligation to construct buildings, and perform site work and remove hazardous materials is binding upon the developer's successors and assignees. This can create problems for anchors. Even if they plan to construct their own stores, they may be unwilling to assume unrelated construction obligations. The developer could indemnify the anchor against such liability, but it would be preferable for the underlying documents to permit transferees of portions of the project to elect whether or not to assume such obligations.

If they are not assumed, the developer (but not the permitted transferee) should remain liable for default. Any assumed obligations should relate only to the portion of the project being transferred and might also be limited to construction of buildings or other specified obligations. A certificate of completion should be issued and recorded by the controlling party when the developer's construction obligations are fulfilled, at which time the property should be released from all construction obligations. Consideration should be given to the issuance of certificates of completion for finished portions of the project before the conclusion of the entire project. This is particularly helpful in the context of phased developments.

Document Structuring Consider dividing a disposition and development agreement into two documents: one that terminates upon completion of construction and another that continues throughout the agreed-upon term. Also, the fact that some constraints set forth in the remaining document mustcontinue almost indefinitely does not mean that other constraints can't terminate earlier. The controlling party should agree to enter into non-disturbance agreements with the anchor tenants, so that an anchor tenant's rights are not terminated if the controlling party exercises any termination rights contained in the underlying documents. The non-disturbance agreement is also a vehicle to set forth those obligations that bind only the developer, not the anchor tenant.

TAGS: News Leasing
Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.