Consideraitons for the Design of Mixed Use Hospitality Developments

By Arthur Spaulding, Jr. Partner, Cox, Castle & Nicholson LLP | April 14, 2013

Hospitality development today assumes many different shapes. Although the development of single-purpose, freestanding hotels still occur, it is common to design hospitality projects to accommodate a mixture of uses. Traditional hotel rooms may be coupled with for-sale residential units, vacation ownership units and commercial components or any combinations of these. The core structuring issues common to these mixed-use scenarios involve an understanding how the various components will interact with one another (or, perhaps, be isolated from one another), how the projects may be structured to permit legally separate leasing and sales activities and, perhaps most importantly, to permit separate financing for each separate component of the project.

The first step in evaluating whether there is potential for creating a properly structured mixed-use hospitality project is to assess the property's zoning and the potential for integrating various components within a single development. Each separate component must be evaluated as if being developed as a stand-alone product at the site, and also as a potentially ancillary product to a primary one. For example, if the proposed development is to consist of a hotel that is housed within a structure that will also contain retail shops and facilities, it will be necessary to assess the underlying zoning in light of the contemplated retail uses. Although most commercial zones are broadly defined to permit a wide variety of businesses, it is possible that one or more of the desired target tenants could comprise a prohibited use.

Once it is determined that the retail uses are permitted, the individual requirements with respect to each of the uses must be examined. Let's take parking, for example. Assume the developer makes plans for a building that will contain a hotel and a national chain drug store. The parking requirements for the hotel might be 1:1 with the measure being the number of hotel rooms within the building (in reality hotel parking requirements may be a part of a conditional use permit process and vary from hotel to hotel). The parking requirement for the drug store might be calculated based on the number of square feet of floor area within the retail space, such as 1 parking space per 250 square feet of floor space. Depending on the lot size and the size of the building footprint, the number of spaces required to accommodate both uses could exceed the site's surface parking capability. This might dictate that some parking would have to be developed in an underground parking garage, or provided offsite, and these considerations could have a profound impact on the development's design, cost and profitability.

The nature, variety and diversity of potential project components will also have a significant impact on the legal structure utilized for the project. Should the developer identify a target market as including more than a single type of use, structuring the project as a "common interest development" might make sense. At its most basic level, the common interest development might be a condominium project. The various units within a building become separately described legal "parcels" or "lots" and the remainder of the building becomes the "common area." The individual units are separately owned, while the owners of the units as tenants-in-common own the common areas. In almost every instance, a non-profit corporation will be formed to act as the "owners' association" and to manage and operate the building on behalf of its members (the owners of the units). A document commonly called a Declaration of Covenants, Conditions & Restrictions (CC&Rs) will be recorded against the title to the property to establish the private rules of governance that will guide and direct both the association and the members regarding the operation and management of the property once it is legally "subdivided" as condominiums.

It should be noted that to structure a mixed-use development (containing a hotel component) as condominiums does not make the property a "condominium hotel" as that term has come to be used. Condominium hotels are particular types of hospitality products where the condominium structure is utilized to sell off the individual rooms to "investors" in order to spread the development costs over a larger group and thus reduce the owner's development costs and increase profit. A discussion of the issues surrounding condominium hotels is beyond the scope of this article.

As distinguished from the condominium hotel model, a mixed-use hospitality project might involve relatively few units. For example, let's consider a hypothetical project that is planned to be built in a community that permits casino gaming. Assume the developer wants to create a project that will encompass a 500-room hotel, a casino, convention facilities, several entertainment venues, a retail mall designed to house 100 "stores," five restaurants, a spa and fitness center, and a timeshare component that is within the building but intended to be sold to an independent timeshare company. Let's also assume that the developer/owner does not have plans to operate all of these separate businesses, but wants the flexibility to sell or lease one or more of the venues to third parties. In this instance, and in order to build in the greatest amount of flexibility for making changes in the future to accommodate market changes, it would make sense to "subdivide" the property to isolate one venue from another. Depending on the local land use and zoning ordinances, the physical subdivision of the underlying property into multiple lots with lot lines approximating the divisions of space within the project structure might make sense. However, if zero-lot-line subdivisions are not possible, then creating a common interest development structure, including condominiums, may be just the thing needed. This might mean creating several different "layers" of legal structure.

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