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Legal Challenges for the Real Estate Developer Part II

In our previous blog, from tax supervisor Velma Garcia, regarding real estate development we began accessing the necessary steps to bring a development project to fruition. In this continuation on that blog we finalize the list of necessary steps towards meeting that goal by discussing Zoning/Entitlement, Construction, Operations, Management & Maintenance, and Financing.

Zoning/Entitlement

In this phase, it is especially important for a developer to have a strong/influential reputation with government, primarily city/municipal, authorities.

In urban areas, development is often restricted by community zoning laws because most city and county government planners engage in Planned Urban Development (PUD), which segregates the uses of real estate (commercial, residential, recreational, etc.) into different “zones.”

The legal risk in this phase covers a broad area of topics such as possible objections against changes in zoning or of not obtaining the required approvals/permits and commercial licenses in the appropriate timeframe. This phase can and often takes longer than expected.

Legal documentation of declaration of covenants, conditions, and restrictions must be set in place and available for inspection as well as easements and encroachments.

The developer should also have in place legal agreements as to who will construct the improvements, how developer costs will be allocated, and who will maintain the improvements once the project is completed. There should also be full documentation of property management contracts and lease agreements for retail, commercial, housing, and office space if applicable.

Of course, this phase is where politics come into play and there is the risk that the project encounters problems due to a change in government, regulations, etc. that is often in the hands of city officials/representatives who must also appease the constituents that they represent. A good developer will often work with the appropriate government officials to determine the likelihood of the project’s required changes before or along the way before even committing to a project.

Construction

The risk in this phase is in regard to pricing, design, quality and possible delays.

Again, the legal issues that must be dealt with have to do with contracts being drawn up correctly. Contracts should address issues arising from change orders and resolving conflicts between multiple contractors. There are various types of contracts available which could limit the developer’s exposure.

At this phase permits and approvals for demolition and construction should be in place. This phase requires the most flexibility from the developer and the expertise to resolve issues that often occur at the 11th hour.

Operations, Management & Maintenance

The legal issues here go back to the Planning phase as to who will manage the project once it is completed.

The developer should already have in place the property management agreements and/or lease agreements required by the capital investors with specifics regarding fees, responsibilities, and how disputes with tenants/users will be resolved.

Financing

Financing can be difficult and lenders/investors should be part of the whole process early on and throughout the duration of the entire project.

Lenders and investors will usually want to be involved with approval of all legal documentation all along the way and it is up to the developer to appease them and be flexible to their needs and demands as they are often a vital piece to funding the project.

For more questions regarding this subject or any other business consulting needs please feel free to contact us.