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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Introduction Last summer, an attorney filed a legal brief he had written with the help of the generative AI platform, ChatGPT. The document included citations to a series of legal cases that seemingly offered precedents that supported his client’s position. There was only one problem. As the judge in the case discovered, six of those cases did not exist. Instead, they were dreamed up by the online tool. This was only one of several high-profile incidents in which new technology has sometimes embarrassed the lawyers using it. Yet many legal experts believe generative AI will also change the legal profession in ways that will aid lawyers and their clients. Lawyers must be accountable for how they use AI. Not only must they carefully assess any bias inherent in algorithms before using it, but they must also consider ethical and fairness issues. AI holds tremendous promise to free legal professionals from the most time-consuming tasks, work more efficiently than ever, and empower them to focus on strategic projects that truly matter. Still, there are many ethical considerations of AI to keep in mind. Ethical Issues Depending on your jurisdiction, there may be formal ethical opinions addressing the use of AI. Be sure to confirm the existence of these ethics’ opinions or guidelines and how they apply to the use of AI. Bias And Fairness AI uses trained algorithms to analyze vast amounts of data. These algorithms can collect biased historical information, which means that the AI system may also inadvertently produce biased results, leading to questionable outcomes. Algorithms can be difficult to interpret, and it can be challenging to understand how they arrive at their decisions or source information. Privacy AI systems often rely on sizable amounts of data, including highly sensitive and confidential information, and may store personal and conversation data. When using the technology, lawyers need to ensure that AI systems adhere to strict data privacy regulations. For example, lawyers using ChatGPT must familiarize themselves with its Privacy Policy and Terms of Use before using the service. Additionally, they must make sure that the data is only used for the specific purposes for which it was collected. Lawyers must also consider professional obligations relating to privacy and information-sharing when providing any information with AI systems to ensure they are not running afoul of confidentiality obligations (to clients or other parties) or otherwise disclosing information improperly. Responsibility And Accountability As a rule of thumb, AI should be used as a complement to work, and not a replacement. While AI can streamline time-consuming and mundane tasks, strategic decision-making, complex legal analysis, and legal counsel are all examples of responsibilities that it simply cannot take over. As a result, lawyers must be proactive in establishing clear lines of responsibility and accountability when implementing AI in their firm. Summary As the use of AI in law firms becomes increasingly widespread, it is important that legal professionals address the ethical considerations surrounding it and ensure the technology is being used responsibly. By doing so, lawyers will be able to enjoy AI’s benefits while maintaining an ethical practice at the same time. In the end, AI has its benefits but it should not be relied upon to accurately apply the law to a fact pattern in the context of giving sound legal advice. Accurate legal advice includes understanding the context in which the law exists, experience and human thoughtfulness.