LAS VEGAS-The success of a given mixed-use project depends on “six critical success factors,” moderator Douglas Howe of Touchstone Corp., Seattle, said at an ICSC Spring Convention session entitled, “Survivors of Mixed-Use Projects – Lessons Learned.” In the past, “development was focused on single-use,” he said. “Financing made mixed-use difficult to do. Single-use was the path of least resistance.
“But changes are occurring, and there are more opportunities,” Howe said, introducing the first of the six critical issues, “premium rents,” which can help validate the pro forma and secure the financing. How does a developer secure those premium rents? “If you create a special place and coordinate the uses,” responded Thomas D’Alesando, SVP of General Growth Properties, Chicago, “people will pay a premium to participate.”
One can’t “necessarily expect premium rents in the initial phase,” cautioned Jon Peterson, SVP of the Peterson Cos., Fairfax, VA. If not initially, that chance could come “later, at renewal time, after the project has come together.”
Critical issue number two is “flexible zoning,” Howe said. “It’s fundamental to the way we execute our plans,” said Ken Reese, EVP of Hillwood Investments, Dallas. “There’s no limit to how much you can push the envelope.”
“It helps us stay up with what the market trends are,” Peterson said. “It allows you to take advantage of when the infrastructure can handle the density.”
“Implicit in the concept of flexible zoning is that you’re not going to do this in one fell swoop,” D’Alesandro added, “but over time, in response to the market.
That provided a segue into critical issue number three: phasing. As a first step, “you need to establish a broad overall plan, creating a vision for the comprehensive whole,” D’Alesandro advised. According to Reese, “critical mass on the retail is the fundamental aspect.” And, in general, “phasing itself is fundamental. It allows you to meet the market with flexibility going forward.”
“The rule of thumb is to build out as much as you can, and then densify,” Peterson advised.
Critical issue number four is synergy between the uses, and while those uses have to “get along,” Peterson pegged it specifically to the parking component. “It’s about the synergy and adjacency between the parking and the uses. It’s a combination of parking and the cohabitation of the uses to create an environment. Parking keeps the energy focused.”
“Parking is fundamental,” Reese concurred. “It’s one of those items you’ve got to know going in.”
The final two issues involve money, panelists agreed. On the subject of public investment, “it’s different from jurisdiction to jurisdiction,” Peterson said, noting that public/private partnerships can be a critical element. “In some cases, depending on the size, some projects just can’t happen without public assistance,” he said, adding that such assistance, out of necessity, can run an average of 15-20% of the total cost of the first phase of a project, and as high as 50%. “It’s a big part of your pro forma.”
And on the subject of private debt and equity, in the past, “when you started stacking the uses, the field of lenders who would do the project, or even understand the project, would narrow,” Peterson said. “Now, more lenders at least understand.” Still, the length of such a project vis-à-vis accompanying real estate cycles “can be a deterrent,” he conceded.
“The market has embraced mixed-use development,” Reese said. Still, their complexity “is something you have to take into consideration,” especially if that adds multiple lenders to the project mix.
“It’s evolved,” D’Alesandro agreed. “Years ago, you didn’t necessarily try to sell the concept of mixed-use development. Instead, it might be, ‘an office building with ground-floor retail,’ or ‘a hotel with retail on the ground floor.’ Now, after a history of successes,” he concluded, “people are much more willing to do the underwriting.”