Part I of this piece which focuses on a not untypical complex development in which all law practice elements of development work are brought to bear addressed some overview issues of a mixed-use development, the master developer, and the purchase agreement. In this second part, we spotlight the equity component of the development, the negotiation of the entity document reflecting the economic and business deal between the developer and its partners, hotel franchise issues, title, unique parking problems, and finally, the development or construction loan.
Following the execution of a purchase agreement, whether for a simple parcel of undeveloped land or for a square block of mid-town Manhattan, the title company designated in the purchase and sale agreement goes to work in producing a title commitment reflecting all the matters affecting the parcel in question. Each of these is an “exception” to title, be it the setback lines or manholes shown on the plat, if any, covering the lot, or the above-mentioned CCR’s. In a master-planned development (mixed use adding additional layers of complexity), there may be numerous plats and those may have been revised (“replatted”) several times. In addition, there are typically a multitude of entities on the master developer side which must be tracked in order to follow the sales of parcels and the applicability of the various exceptions.
In this context, it came as no surprise that title review revealed that various sets of CCR’s claimed to be applicable to the property were in fact not, and that many of the CCR’s which were applicable contained provisions affecting development matters which needed to be further discussed between purchaser and seller (the developer and master developer). All this review and the objections to title needs to be communicated and explained to both the title company, the seller, and the clients, a process which few realize takes as long in time as the review itself.
A separate six-month negotiation ensued shortly after the execution of the purchase agreement with a prospective equity partner. The equity required for a hotel project is usually between a minimum of 30% to 40%. Given a hotel development of between $10,000,000-$30,000,000, few if any developers can avoid having to raise equity funds from third parties, and the individuals or entities providing millions of dollars of cash whose return is by definition subordinated to the first lender’s financing do not do so without extracting very significant and substantial oversight and veto rights, to say nothing of such an equity partner’s objective to extract the maximum returns in the circumstances of every conceivable outcome, good, bad, or mediocre. Just how far those rights go in cutting into the developer’s role and discretionary authority as the fundamental decision-maker who brings the project to completion is always the subject of a protracted and usually excruciating negotiation.
Beside having to deal with this issue on both the master developer level as well as the equity partner level, we faced in this project at the outset the daunting task of negotiating all these issues through a proposed agreement presented by the equity partner as its “standard” (never to be taken seriously) which contained in more than five dozen sections provisions which any real estate attorney would consider to be completely “over the top” positions on which his or her client would likely draw the proverbial “line in the sand”. Such objections to the general format and perspective (“we make the rules because we have the gold”) before even getting to discussing purely business terms which ultimately are for the clients to decide, only made the process that much more difficult. Equity partner’s legal fees paid for by the developer: Over $100,000.
Before getting to the closing line, and while simultaneously working on the development loan, there lying in the middle of the road blocking the way to the finish line was the franchisor of the hotel’s “flag.” Its consent was required with respect both to the master developer’s right to approve plans (usually reserved to the franchisor); the master developer’s initial plans to create a condominium whereby its air rights would be one apartment and the hotel another, which it subsequently abandoned): and the master developer’s insistence, in the ultimate game of “chicken”, on its rights to develop its air rights any way it wished, and the franchisor’s insistence on absolute approval rights. (Any flag owner, be it Marriot, Intercontinental Hotel Group, Hyatt or any other believes it has the right to determine what other businesses are operating on the same parcel as the hotel.).
Chipping away at the position of each with incremental concessions on both sides while the developer moved up the hotel company’s hierarchy to enlist higher authorities to allow concessions cost weeks while the master developer threatened (somewhat unconvincingly in the circumstances of the timeline to have gotten that far) to blow off the hotel developer because of the intransigence of the franchisor. Of course the equity partner had to be consulted at every step.
And then there was parking, as just one example of the “unexpected” (but which can with certainty be anticipated) development issues The hotel had its own parking lot on the parcel being acquired, but it turned out that one of the replats covering the hotel lot showed that “surface parking” was allowed on a “temporary” basis pending the construction of the parking garage and retail facility within the air rights granted to the master developer. (In order for a plat to be effective it must be accepted by the city, and at that point it is in effect a zoning law.) But what if the air rights were never developed, as was within the seller’s sole discretion? Obviously the lender, as well as our client would have had a problem with the loss of its 54 surface spaces. The City had to be enlisted to provide a letter satisfying the lender to the effect that if the garage never got built, the surface spaces could stay. Of course, getting the letter required that the City, in its master plan approval of the development, did not consider the construction of the garage significant enough to warrant impeding the hotel development, given that it could be shown that there was sufficient parking in relevant locations.
Likewise, our client’s surface parking spaces were not sufficient for the hotel, so there had been a long negotiated agreement in place for use of an additional 100 or so spaces within the office tower’s parking facility. But, both we and the lender asked, how can we be sure that the “non-exclusive” license giving the right to use these spaces satisfied the zoning requirement? And what if, as lender’s lawyers are prone to ask, the garage facility implodes or burns down and is not rebuilt? Non-exclusive by definition means that the spaces might not be there if there was a great movie on or a big reception at the the offices. Solution to satisfy lender? Get another letter from the City stating that the hotel’s parking requirement could be satisfied by “open parking” (non- exclusive) anywhere within the acreage of the master development.
Somewhat surprisingly, and at odds with what might have been expected relative to most comparable developments, the negotiations with the lender were less agonizing, despite the issues involving mixed-use development and the interrelationship between the moving parts of the entire development, as well as the air rights issues. In fact, the lender attorney’s involvement, for the most part, stretched out only over the final two to three months culminating with the closing, although their legal fees would not so indicate. But for not having raised more difficulties than they did, the developer should have thanked his lucky stars. Lender’s legal fees: Over $60,000. Master developer’s legal fees: Probably between $150,000-$200,000. Developer’s attorneys’ fees? We were able to charge very substantially less relative to the others (taking into account that we were involved in each of the loan, master develop, franchisor, and equity partner negotiations), thanks to the inherent efficiency of involvement in all aspects of the development, and the lower overhead which comes from small firm and solo (but deeply experienced) practice.