In case you’re not familiar, let’s first clarify what mixed use means. It’s a type of business that has different units that aren’t necessarily expected (or zoned) for the same use. In other words, a building could have retail stores at the ground level and above it is a multifamily residential development. Alternatively, there could be a mix of offices and an industrial warehouse space. The latter idea is common for companies holding their own inventory in-house but needing to manage the business within their office.
On the financing side, there are also sometimes restrictions on the loans that are supplied based around them being for mixed-use developments or existing properties. For instance, some U.S. government-backed lending requires residential mixed-use running at 80 percent. This can be for a variety of reasons including providing access to enough residential housing in the area or to avoid a location becoming too retail-oriented or business-oriented. It also assures that there will be enough skilled labor living nearby too.
Succeeding with Mixed Use Developments
Mixed-use developments are more challenging to design, develop and complete than other commercial real estate. The use of the land for different purposes and one or more buildings must be appropriately zoned to avoid complicating matters.
It’s necessary to understand the local market to anticipate its needs. For instance, planning for too many offices to rent on the upper floors with the retail stores below can lead to a higher occupancy rate if the location of the development doesn’t suit knowledge workers who have to commute there every weekday.
Similarly, if the mixed-use development includes retail space at the ground and 1st-floor levels, but apartments above that, what’s attractive to people looking to buy or rent an apartment in that area? Is the retail space near to other developments that it will be competing with? Is there a confirmed demand for more retailers in the local area? Also, is there a community and neighborhood shopping center nearby which is anchored by a Walgreens, a laundromat and a major drug retail chain that remains busy throughout the day?
These are all useful considerations to ensure a mixed-use development is needed in that area.
Are There Winners and Losers?
Mixed use commercial developments benefit the local community in various ways. Often, they’re popular because they offer a blend of different services or job opportunities.
For example, a mixed-use building with offices on the upper levels provides fresh office space to small businesses needing to expand. These companies, in turn, employ many local people which improves their job and career opportunities for people in the surrounding areas. Similarly, when retail outlets open up, this offers employment for younger people, those attending college and other potential employees looking for this type of work.
Lending for Mixed Use Projects
When it comes to mixed use development financing, it’s not always long-terms deals that get put in place. This might be surprising, but every deal is unique in that sense.
Loans are made for mixed-use purposes over short-term periods of just 6 up to 18 months. They’re also lent out over 5 years for larger developments that won’t be completed in that amount of time. The financing for mixed-use properties has different combinations of loans spanning different durations too. It’s not a cookie cutter approach with mixed-use lending for commercial purposes.
For new builds, for instance, construction loans for mixed-use might cover the period of construction or rehabbing a property with the costs during this period being the loan interest alone. It could also be a bridging loan to cover shorter periods or in between other longer-term lenders provided by private lending organizations or commercial banks (these are often backed by a government agency to provide reassurance to the lender).
Mini-Permanent Loans for Construction to Occupancy
In a situation where a piece of real estate is being developed, or a rehab is happening to get it to a point where it will be leased and rented out, then lending may take a different approach. When the expectation at the start is not that the property will be developed and later sold, but instead held for a longer period, perhaps decades, then funding is approached differently from the very beginning.
With a mixed-use mini-permanent loan, it covers construction for the anticipated period that it will take to complete. The owners will apply for and obtain a certificate of occupancy. This confirms how the structure will be used, its suitability (relating to complying to relevant codes and standards for how it will be used) and also that the building is complying in all other regards too. At the stage where this is issued and the real estate is almost completely leased (usually over 90%), the mini-permanent loan will repay any separate construction loans taken out to get construction underway. Usually, this the mini-perm lending is up to five years in duration.
After this period, the owners will seek to arrange a commercial takeout loan, a mortgage or another type of lending at a sensible rate over a 30-year period. This is then appropriate for a leased out and mostly rented, mixed-use commercial real estate which now has more predictable cash flows to pay for a loan of this type, at which point the mini-permanent loan will get repaid.
While a mixed-use development might seem like it’s only about the developers and lenders, in fact, it’s a joint effort all around. Unless the local community “buy into” the property development and actively embrace it, any retailers will remain mostly empty after they’ve opened. We’ve all seen malls that never took off because the general public didn’t find what they offered or their location to be useful to them.
Developments that are designed as mixed-use hedge their bets despite the added difficulties in this type of development because they offer a variety of incentives for shoppers and people wanting a better job or a more expensive apartment with a better view of the city. By anticipating the needs of the people who will make use of the real estate in a variety of ways, this ensures a greater likelihood of success.
published gloucestercitynews.net | May 13, 2019