I was invited recently to speak at the Illinois Institute for Continuing Legal Education Annual Real Estate Short Course to discuss what every lawyer should know about commercial real estate development agreements. In preparing for the presentation, a developer client suggested it is not only attorneys who need to know about development agreements – developer clients do as well.
So, on that note, the following is my list of the top 10 things attorneys and developers should know about commercial real estate development agreements.
TOP 10 THINGS TO KNOW ABOUT COMMERCIAL REAL ESTATE DEVELOPMENT AGREEMENTS
1. Development Agreements are not the same thing as Construction Contracts.
2. There are no “master form” Development Agreements.
3. Each Development Agreement is unique to the specific development to which it relates, and must accommodate the sometimes conflicting needs, demands and desires of the constituent stakeholders, including the property owners, prospective tenants and users, project lenders, municipal governments, including government partners in public-private partnerships, investors, public health and safety authorities, transportation authorities, project neighbors, and other stakeholders.
4. Development Agreements require a development plan encompassing a broad vision of what is planned at the development site.
5. Development Agreements require an understanding of how the site must function after development is complete, and must include provisions to facilitate and assure post-completion functioning.
6. Development Agreements should be sufficiently flexible to accommodate changes in Market Demand.
7. Development Agreements must accommodate and assure commercially sufficient access to and from the development site, as well as pedestrian and vehicular traffic flow and parking (if applicable) within the development site during and after construction and development, and into the future.
8. Development Agreements must comply with public and private land use controls and must assure permanent or long-term mechanisms to promote and preserve the sound functioning of the development, including a means to adapt, add-to and maintain necessary utility systems and services to accommodate future change.
9. Development Agreements must accommodate development financing and long-term project financing, and refinancing, and a means to pay for ongoing maintenance, replacement and repair of the development site and the improvements on the development site.
10. Development Agreements are typically based on an initial development concept plan, and, through negotiations, evolve to meet the needs, wants and desires of the various stakeholders. This is particularly true if the development will include any form of financial incentives, or special entitlements from municipal or other government sources. A Development Agreement will often include binding covenants for the benefit of the public in return for governmentally provided financial incentives such as tax increment financing, special service area financing, business district financing, sales tax revenue sharing, tax credits, real estate tax abatements, grants, municipal leasing, municipal mortgage financing, or other sources of public funds. The covenants benefiting the public in consideration of government funds may include short and intermediate-term employment targets, MBE/WBE contracting requirements, environmental clean-up requirements, blight removal requirements, open space requirements, public amenity requirements (parks, fountains, bicycle paths, public gathering spaces, water retention facilities, etc.) or just about any other requirement which a municipality may conclude will promote economic development or other public good within the community.
Legal Authority for Illinois Municipalities to Provide Public Money for Private Development
The legal authority of Illinois municipalities to provide public money to private developers to promote economic development is confirmed, inter alia, in the following cases:
- People ex rel. City of New Salem v. McMackin 53, Ill. 2d 347, 291 N.E. 2d 807, 813 (1972)
- Clayton v. Village of Oak Park, 171 Ill. Appp.3d, 560, 73 Ill.Dec. 112 (1st Dist. 1983).
- People ex rel. City of Urbana v. Paley, 68 Ill. 2d 62, 11 Ill. Dec. 307 (1977)
- Kelo v. City of New London, Connecticut, 545 US 469, 162 L. Ed. 2d, 439, 125 S.Ct. 2655 (2005)
Money continues to be tight for developers, and economic development is badly needed by most communities. The solution for each can often be a public-private partnership to encourage economic development and bridge the funding gap. The first task is to recognize the opportunity. Next is to know how to proceed to plan and facilitate commercial real estate development that accommodates a public purpose to justify the infusion of public funds to promote economic development. Last, is to execute the development plan to fulfil the mutual benefit of community stakeholders, the developer and its investors.
The commercial real estate development agreement is the vehicle by which the public-private partnership is documented to protect the interests of the respective stakeholders. It’s purpose is to document in clear and legally enforceable terms, the scope of the development plan and what is to be expected by each participant in the public-private partnership.
A properly envisioned and drafted commercial real estate development agreement will help assure that all stakeholders have a clear understanding of their rights and obligations – including development criteria and funding commitments – to minimize future disputes and maximize the likelihood of successful development.
Public-private partnerships are not new, but they are the wave of the foreseeable future. Public-private partnerships serve to stimulate economic development to achieve local government objectives and to enable commercial real estate development in uncertain economic times.
Thanks for listening.