Western Real Estate Business

OCT 2018

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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M A R K E T H I G H L I G H T: C O L O R A D O 26 • October 2018 • Western Real Estate Business www.REBusinessOnline.com Retail is on fire! How can that be possible with ecommerce dominating most news cycles? The answer may lie in the reality that consumer behav- ior and convenience drive retail hab- its, and retailers are adjusting to meet their customers' needs. That said, many retailers are grow- ing very cautiously, or expansion plans are on hold. This holds true for many large format restaurants, soft goods re- tailers and even grocers. Retailers are adjusting footprints as omnichannel sales are permeating through most cat- egories enabling many groups to have less floor space. Other than fitness and entertainment, most mid-box and big box growth is modest at best. It would be logical to assume space is abundant, creating opportunities for growth. This is not the case in Denver as the market feels as tight as it has ever been. Class A space, specifically in the small restaurant tenant space is almost impossible to find. This is also the case for mid-box and big box properties. A couple former Sports Authorities spaces show the appetite this market has for well-located space. Shae Properties Town Center in High- lands Ranch turned its Sports Au- thority into a Blue Lion Salon Suites. Vestar's Bowles Crossing in Littleton converted its vacant space into a Vasa Fitness that backs up to a newer Trader Joe's store. These are both suburban shopping centers. Urban and infill retail has been very active, too. Developers are scrambling to tie up sites for redevelopment be- fore this nearly 10-year-long cycle winds down. Many of these projects are small in scale and redefining land- scapes in neighborhoods like Berkley or Sloan's Lake. Larger developments are taking shape as well. The I-25 corridor going north and south from Denver are ex- tremely active with the most notable project being Alberta's Promenade in Castle Rock. Continuum Development also continues to make waves follow- ing their involvement with the Union Station redevelopment — perhaps Denver's most transformative project in history. Nearly an entire city block is under construction in pursuit of their vision. Retail is healthy in Denver though, in many ways, its growth is being re- stricted by limited supply. This is most pertinent in high-demographic areas as everyone is chasing consumers with the most spending power focusing on convenience. — Matt Writt, Vice President of Retail Brokerage, JLL RETAIL REMAINS STRONG IN DENVER, THOUGH FUTURE GROWTH MAY BE STUNTED O n Feb. 12, 2018, the Denver City Council voted 11-1 to approve changes to the Denver Zoning Code and Municipal Code with the intent of allowing property owners to build struc- tures up to 16 stories tall in the RiNo neighborhood. The newly adopted ordinance creates two new overlay districts—the River North Design Over- lay (DO-7) District and the 38th & Blake Station Area Overlay (IO-1) District—and provides height incentives allowing developers who provide afford- able housing or community benefits, and imple- ment new design criteria, to build higher than the maximum permitted height in the underlying zone district. The DO-7 overlay establishes enhanced design review criteria for all structures located within its boundaries. Features include elimination of the minimum parking requirement within one-half mile of the 38th & Blake Light Rail Station, increased requirements for screening/mitigating structured parking and designation of the Platte River for treatment as a "primary" street. The IO-1 overlay is the first "Incentive Overlay" district in Denver, and developers intending to embark on new projects in any rapidly developing portion of the city should understand the nuances of this new legislation. This is because the city intends to utilize it as a template for providing additional height incentives in exchange for afford- able housing in other areas of Denver. In the IO-1 overlay district, the amount of afford- able units and incentive height linkage fee required for those portions of any building constructed above the base height permitted by the underlying zone district is four times the required units and amount of the city-wide linkage fee under the city's current affordable housing linkage fee ordinance, which was adopted in fall 2016 ("Linkage Fee Ordi- nance"). Complying with the Off-Site Build Requirement Unlike the Linkage Fee Ordinance, residential and mixed-use residential in the IO-1 overlay must construct affordable on-site or off-site residential units of "similar tender" and are not permitted to pay a fee in lieu of building units. In other words, a market rate for-sale project must build (either on- or off-site) affordable for-sale units, and a market rate for-rent project must build (either on- or off-site) affordable for-rent units. Any off-site units must be within ¼ mile of the market-rate development. These requirements are challenging for market-rate for-sale developers, as inventory for affordable for- sale units in RiNo is de minimis. Developers seeking to utilize the off-site build alternative must enter into a three-party escrow agreement with Denver's Office of Economic Development (OED) and the affordable developer. OED must sign off for the release of draws by the affordable developer based on satisfaction of con- struction milestones. Additionally, off-site units be constructed within 24 months of building permit issuance, or the escrowed funds will be released to OED. Further, temporary and permanent cer- tificates of occupancy will not be issued to the market-rate development unless the affordable off- site units are marketed concurrently with, or prior to, the associated market-rate units. Compliance with these requirements complicates a market-rate developer's ability to secure customary equity and debt financing for a project, because completion and stabilization of the market-rate project is dependent upon completion of the affordable project, and the market-rate developer likely won't have control over completion of the affordable project. Adoption of New Rules and Regulations to Implement New Legislation The new legislation also authorizes the city to revise the initial rules and regulations adopted in July 2017 for the Linkage Fee Ordinance to address both the Linkage Fee Ordinance and the 38th & Blake Station Area Overlay, but until such new rules are adopted, the initial rules apply to both sets of legislation. No public draft of the new rules was available at the time of writing this article, so it is difficult to predict the impact of the new rules on developer requirements associated with increased building heights. Although the impact of the new rules are unknown, they may extend the current required 20-year period of affordability—potentially to require a permanent affordability period. The new rules will also likely address the definition, and process for approval, of a "Community Benefits Agreement." In the IO-1 over- lay, market-rate developers of "mixed-use non-residential" projects may construct projects at incentive heights without paying incentive height fees or building affordable units by entering into a Community Benefits Agreement providing community-serving uses within a development, but at the time of writing this article, little is known about the require- ments or approval process for a Community Benefits Agreement. Right of First Refusal Moving forward, OED may take the position in the new rules that any new development utiliz- ing the height incentives in the IO-1 overlay is receiving a "city subsidy" as defined in Denver's municipal code. This interpreta- tion could result in imposition of a right of first refusal ("ROFR") on a project in favor of the city. Such ROFR would render any third-party agreements for pur- chase and sale of the project con- tingent upon providing a copy of the executed purchase agree- ment to the city, thus beginning a 120-day period during which the city must exercise the ROFR by delivering notice to the seller of its intent to purchase the property on economically similar terms to that of the contingent purchase agreement. After exercising the ROFR, the city must purchase the property within 120 days after sign- ing a separate purchase agreement with the seller. This ROFR could make it difficult for market-rate developers to procure construction and permanent financing and impair the long-term marketability of a property. Blair Lichtenfels and Bruce James are shareholders and Kate Stevenson is an associate with Brownstein Hyatt Farber Schreck's Denver office. DENVER CITY COUNCIL IMPLEMENTS LEGISLATION ALLOWING STRUCTURES UP TO 16 STORIES IN RINO Changes to municipal codes in Denver's RiNo neighborhood could spell opportunity for developers. By Blair Lichtenfels, Bruce James, and Kate Stevenson of Brownstein Hyatt Farber Schreck Lichtenfels James Stevenson

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