Real estate development during COVID-19

Daniel Shapiro & Ian Brown • May 22, 2020

During hard economic times, developers should review their agreement and explore all options

In these extraordinary times, developers, landlords and property owners should consider closely reviewing their annexation or development agreements to determine if amendments or modifications may be necessary.

Some components of the development agreement to review include timing, terms, conditions, and deadlines all of which could be necessary to effectuate P.U.D. plans and plats of subdivision. When it comes to timing, be sure to review treatment of ordinances and fees. Similarly, some agreements set other deadlines that require commencement of construction, applying for building permits, or getting approval of the final plat of subdivision within a certain time frame. Missing such deadlines may result in the property reverting to prior the zoning or even the revocation of special use permits.

Often development agreements will freeze specific municipal ordinances and fees for certain durations of time. Developers may want to seek to extend those dates in order to get some financial relief. However, it more important than ever to keep in mind that many local governments are also financially struggling right now. Unless the federal government moves forward with bills such as the HEROES Act which in part provides financial support for local governments, some local governments may not be able to offer additional extensions or financial relief to developers even if it wanted.

Nonetheless, it may be appropriate to at least open the conversation with a local government about fees, as it is possible that saving certain development projects could be an important source of tax revenue and jobs for the community. A few of the most common and important fees that should be reviewed are:

  • Impact fees
  • Recapture fees, and
  • Connection fees
There may also be other required payments at different stages during and after the development, i.e., inspection fees and tap on fees. All obligations should be reviewed for timing or continued applicability. It is possible that municipalities may agree to extensions or temporary relief of obligations in light of the current health and economic crisis in order to prevent a project from collapsing.

Additionally, it is wise to review timing of any commercial development incentives that may be owed to a project. Exploring new incentives may be appropriate especially if a project can be revised to provide extra amenities that benefit the public. For example, a municipality may consider new development incentives if a developer agrees to create open space to provide more social distancing options for users and members of the public. Potential incentives include:
  • Tax Increment Financing (TIF)
  • Business Districts (BD)
  • Special Service Areas (SSA)
  • Special Assessments (SA)
  • Abatement of sales and/or property taxes
The most common incentives are TIF and Business Districts. TIF is a financing tool to stimulate re/development in areas with exceptional development challenges and costs. TIF works by allocating future increases in property taxes of a specified area (a “TIF district”) to pay for improvements within that TIF district.

As we wrote about in a prior article there have been instances of poor uses of TIF and criticism of its use, many local governments have found TIF to be a very useful tool in their incentive arsenal. Under TIF, eligible redevelopment expenditures include:
  • Upgrading and improving public infrastructure, such as road and sidewalk repairs, utility upgrades, and water and sewer projects;
  • Acquisition, clearance and other land assembly and site preparation;
  • Revitalization of deteriorated or obsolescent commercial buildings; and
  • Incentives to retain or attract private development.
Business Districts allow municipalities to add an additional sales tax or hotel/motel tax of up to 1.00% in 0.25% increments on retail goods and hotels within a contiguous area designated by a municipality (home-rule or non-home rule). Eligible redevelopment expenditures of Business District funds include:
  • Encouraging new or improved retail shopping centers and stores;
  • Creating entertainment and restaurant areas;
  • Modernizing outdated retail and office development to attract users and spending; and
  • Establishing and maintaining a revolving loan fund related to the above uses.
An area can qualify for a Business District if it meets certain criteria of blight (similar but distinct from the TIF blight conditions). Such criteria include economic underutilization of the area and deterioration of site improvements. Additionally, to receive funds from TIF, Business Districts or other development incentives, developers must also demonstrate to a municipality that there is a gap in financing or extraordinary risk in the project. This is known as the “But For” Concept. That is, the project would not be possible “but for” the development incentive.

Right now, it is prudent to weigh all options that can benefit the stability of a development project. Renegotiating development agreements including development incentives may be a sufficient option for some. For others, transitioning to or incorporating new products and/or users might be appropriate alternative.

Shapiro & Associates’ Pro Bono Program offers guidance for small businesses in need through legal counsel rooted in experience in complex development. Contact us for more details or a free consultation.

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