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61Â Â 5.1 Introduction and Summary of Best Practices This is the last in a series of four chapters addressing the sequential stages of the JD process. It covers the execution of a project once a pre- liminary developer selection has been made. While developer selection is a significant milestone, the project at that point has barely begun. Ahead lies a sequence of negotiating a JDA; finalizing the developer award; advancing design, permitting, and financing; closing on the real property conveyance; overseeing construction of the project; monitor- ing the on-going interests and obligations to which the transit agency is a party; and, in the case of multi-phase projects, repeating these steps as applicable for each later phase. Throughout this process, it is critical to move as expeditiously as the facts allow. As agency practitioners and developers often say, âtime kills deals.â No less important to a developer is predictability; a culture of predictability running through an agencyâs JD program, and the value it creates, is described in ChapterÂ 7. To keep the negotiation, closing, and delivery stages of a project moving expeditiously and predictably, it is essential that the agency speak in one voice, anticipate issues, and avoid untimely surprises. As described in ChapterÂ 2, this requires interdepartmental coordination, managed proactively by the TOD/JD director with the clear support of agency leadership. Such coordination should already be in place, estab- lished at the outset of the planning phase. A coordinating committee or process, chaired by the TOD/JD director or designated project manager, should include representation from relevant transactional departments (legal, real estate, revenue, parking, public and community affairs) and operational departments (bus or rail operations, engineering, public safety, system acces- sibility). This is not a bureaucratic detail; it is essential to the work described in this chapter. C H A P T E R 5 Executing a Joint Development Project Executing a JD Project 1. Maintain inter-departmental coordination and review throughout the process, driven by TOD/JD office. 2. Conduct an orderly negotiation sequence; exclusive negotiating period, joint development agreement (JDA), closing (lease, sale, other). 3. Maintain an appropriate role in press and external stakeholder relations, entitlements and approvals. 4. Conduct design review and construction oversight based on the agencyâs published manual or standards, complexity and risk of project, and proximity to station. 5. Establish a durable framework ensuring long-term project control: e.g., limits on change of use and sale or assignment; non-subordination of ground lease. 6. Establish a durable framework to enforce on-going developer obligations: e.g., payments, reporting, operation and maintenance, safety, remedies for default. Chapter 2: Creating a Joint Development Program Chapter 3: Planning a Joint Development Project Chapter 4: Choosing a Developer Chapter 5: Executing a Joint Development Project
62 Guide to Joint Development for Public Transportation Agencies 5.2 Joint Development Agreement The period between the preliminary selection of a developer and the final closing on the real estate transaction revolves around the negotiation of a JDA. In this negotiation, the details of the physical project and the business transaction are refined, the developerâs selection is final- ized, and the conditions governing the closing and the actual construction and operation of the project are established. If the project plan and the preliminary developer selection were sound, agreement is likely. But there is no guarantee. The negotiations and agreements described below require highly specialized skills on the part of the transit agency, especially in the areas of real estate law and finance. ChapterÂ 2 addressed the importance of cultivating these skills through a combination of in-house and consultant resources; ideally, the experts involved will have already participated in planning the deal struc- ture and the solicitation document. Given the variety of solicitation methods, applicable laws, and regional vocabularies, there is no uniform template or nomenclature for the major post-selection milestones. For consistency and clarity, this guide uses the terms exclusive negotiating agreement, JDA, and real estate closing, as defined below. Sequence of Events FigureÂ 29 summarizes the events that unfold, with variation, from preliminary developer selection through the negotiation process to the real estate closing and beyond. For reasons explained below, the diagram differentiates between projects in which the prelimi- nary developer selection was based on an RFP with full proposals, on the one hand, and those where the selection proceeded directly from an RFQ, on the other. To convey the logical rela- tionship among the key steps in this sequence, they are outlined below in reverse order, working backward from the real estate closing. Real estate closing. The objective of the negotiation process is to arrive at a real estate closing. This is the occasion at which the JD property, or a bundle of rights associated with it, is conveyed to the developer through the execution of the ground lease, the deed of sale, or, in Figure 29. Sequence of joint development agreement and closing events.
Executing a Joint Development Project 63Â Â some cases, the transfer of the property to a joint venture or LLC in which the transit agency and the developer are partners. The determination of which type of conveyance to use will presumably have been made during the pre-solicitation planning phase of the project and then articulated in the solicitation document. JDA. The closing, the substantive and legal conditions leading up to it, and all the rights and obligations that survive it are governed by a master agreement, which in this guide is known as a JDA. Execution of the JDA is generally concurrent with, or closely preceded by, the conversion of the preliminary developer selection into a final selection or award. Some agencies break the negotiation of the JDA into two stages: a robust term sheet, in which the key provisions are agreed to in rich outline form, followed by the full agreement. This phasing enables the negotiators to resolve the main substantive issues before becoming immersed in the final language of the entire document.1 For a discussion of JDAs and some recent examples, see AppendixÂ I.2 Alongside the JDA, the parties typically negotiate the ground lease, deed of sale, or other instrument of conveyance to be executed at the closing. This conveyance instrument may supersede the JDA, incorporate it, or stand alongside it. Exclusive negotiating period. Most transit agencies require that the preliminary developer selection be approved by a vote of the governing board, based on a recommendation from senior executive leadership. That vote normally includes an authorization for the staff to enter into a period of exclusive negotiation with the developer in question. This period is often governed by an interim agreement; while nomenclature varies, this guide uses the common term exclusive negotiating agreement. (Some agencies avoid the need for a separate contractual agreement to govern the exclusive negotiating period, relying instead on a framework and schedule stated in the solicitation document and restated in the board vote authorizing negotiations.) A crucial question during the exclusive negotiating period is how to keep the parties bound to each other and negotiating urgently and in good faith. The exclusive negotiating agreement (or absent an exclusive negotiating agreement, the board vote authorizing negotiations) should include a deadline; if that deadline and any extensions the agency may grant are not met, and the staff is convinced that further negotiations will be fruitless, the agency may at its discretion terminate the negotiation and turn to the next-ranked proponent. An additional incentive is to require a substantial, non-refundable deposit by the developer. For example, in BARTâs exclu- sive negotiating agreements this âexclusivity feeâ is applicable to BARTâs negotiating period costs (which the developer is obligated to fund). The length of the exclusive negotiating period may vary with the solicitation method that was used. In projects where the developer was selected through an RFP, with a full development and financial proposal in hand, negotiating a JD agreement should take 60 to 120Â days, depending on the scale and complexity of the project. (If a best and final offer was used as part of the RFP process, with key terms specified prior to selection, the exclusive negotiating period can fall at the short end of this range.) As noted in ChapterÂ 4, an alternative practice gaining some currency is to select a developer based on an RFQ only. In these cases, the proposed project and business transaction will be developed during the exclusive negotiating period. The exclusive negotiating agreement should therefore provide for a longer period, with milestone deadlines for the submittal of proposed development and financial terms. An example is BARTâs exclusive negotiating agreement reached in 2019 with the selected developer for Lake Merritt Station; the exclusive negotiating period was 24Â months.3
64 Guide to Joint Development for Public Transportation Agencies Table of Contents: Key Joint Development Agreement Issues The contents of a JDA vary among transit agencies and among projects of differing scope and complexity. FigureÂ 30 presents a sample table of contents, encompassing items generally applicable to projects of moderate to high complexity. FigureÂ 30 also serves as the table of contents for the remaining sections of this chapter, in which the key procedural and governance-related topics of the JDA are discussed in the context of project implementation. (The first section of the table, containing the substantive and commercial agreements relative to the project itself and a development schedule with specific performance milestones, is unique and project-specific.) SectionÂ 5.3 addresses the process of advancing from the JDA to the closing, including the conditions precedent to the closing itself. SectionÂ 5.4 addresses construction of the project (or the first phase of a multi-phase project) once the closing has occurred. Finally, SectionÂ 5.5 addresses the durable framework of governance that the JDA establishes for the on-going conduct of the project, including downstream revenues and other obligations due the transit agency. Figure 30. Sample joint development agreement table of contents.
Executing a Joint Development Project 65Â Â 5.3 From Joint Development Agreement to Closing Community Relations and Project Approvals The JDA normally assigns the developer the responsibility for securing the projectâs remaining entitlements, permits, and approvals, including regulatory outcomes as well as the financing neces- sary to complete the privately-funded parts of the project. However, this does not necessarily mean that the developer is solely responsible for initiating and maintaining contact with other public agencies and officials. There may be specific approvalsâthose involving FTA, for exampleâwhere the transit agency, as a matter of course, would retain the initiative. More broadly, the question of how much the transit agency remains involved in external stakeholder relations once a developer is on board is a strategic and political question as much as a substantive one. This question must be addressed, at least in a preliminary way, as soon as the exclusive negotiation period begins, since the need to deal with public agencies and elected officials may arise right away. The transit agency should establish a general policy at the outset, which can be refined in the JDA. This consists of the following three elements. Protocol for interaction with public agencies, elected officials, and the press. A transit agency is a public body, with a governing board that is either appointed by elected officials or, in some cases, elected in its own right. The agency CEO is a public figure, who has on-going relationships with local, state, and federal agencies, including their senior executives and elected leaders, and with the press. It is important to establish early on the protocol for dealing with the press. In general, media relations with respect to the project should be controlled by the transit agency, with the developerâs role (and the protocol for responding to press inquiries) clearly understood and agreed to. No less important is the need to establish which public agencies are to be approached only by the transit agency or as a result of an introduction from it. This will presumably include FTA and may include others where the relationship is either sensitive or particularly close and collaborative. The transit agency should be especially clear with respect to discussions with elected officials. Once the developer is cleared to talk with a particular office or agency, it is advisable that the TOD/JD staff be kept aware of those discussions as they proceed. The intent is not to create a cumbersome or bureaucratic process. If the developer is local and has cordial relations with the relevant agencies and officials, the protocol should naturally reflect that. But the transit agency will be politically accountable for missteps regardless of who makes them. Moreover, if contentious issues arise during the JDA negotiations, the developerâs reasons for talking with other agen- cies may be related to those issues. From the transit agencyâs perspec- tive, the protocol should be intentional and clear. The entitlement process. As discussed in ChapterÂ 3, the transit agency should already have vetted the project with local land use authorities and community stakeholders before developer solicitation. Ideally, these discussions will have settled zoning and other major regulatory issues. Even if this has occurred in full or in part, there will almost always be entitlement work to be done once the developer has been selected. The survey of transit agencies undertaken for this guide found a difference of opinion in how transit agencies manage this stage of the process. Some require the developer, once selected, to fully take over entitlement issues and associated stakeholder outreach, while others remain visibly involved in the process. Best practice is to make the developer responsible for entitlements but not âhand them the keys.â
66 Guide to Joint Development for Public Transportation Agencies There are tradeoffs involved, with pros and cons to both approaches. In general, the relative abilities of the transit agency and the developer to lead this critical function will reflect the actual people involved, their experience, and their relationships with the relevant jurisdictions and stakeholders. There are advantages in leaving this responsibility to the developer: â¢ Since the JDA generally assigns responsibility for entitlement and approvals (and hence the risk of not achieving them) to the developer, the developer should have the ability to set strategy, create supportive materials, and put its best foot forward. â¢ The outreach, entitlement, and approval process can take time and resources. If the transit agency has chosen a developer in which it has confidence, it makes sense to shift those costs to the developer as much as possible. â¢ Many transit agencies see the developer as more sophisticated in this arena than agency staffâ âthis is what they do,â as more than one agency stated in the survey. That said, however, even if the agency lacks experience in advancing development projects, the developerâs real-world capability may depend on whether the team is local or at least includes an experienced local community outreach and public approval consultant. The risk of leaving this process entirely to the developerâarticulated by several agenciesâ is two-fold: â¢ The developer may face stakeholder pressure that could negatively affect the deal from the transit agencyâs standpoint; or â¢ A developer controversy may adversely affect a valued local relationship of the transit agency. Based on the agency survey and the experience of the research team and project panel, the recommended best practice is to make the developer responsible for entitlements and approvals but not to hand them the keys. It should be understood that the transit agency will have input on strategy, will follow the process closely, and will be ready to step in as needed, including attend- ing meetings and sharing the public stage with the developer, if the TOD/JD director finds it necessary for staff to do so. Funding and financing approvals. Responsibility for approvals necessary to complete the funding and financing of the private development is straightforwardâin virtually all cases, it rests with the developer, who is required to present conclusive evidence of financing in order to close on the JD property. In addition to private equity and debt, the developerâs financing plan may include grant, loan, or tax credit programs administered by public agencies or quasi-public development corporations. Typically, the developer is the applicant; the information required is largely financial information originating with the developer; and the approval process by the funding or financing agency in question is either an internal staff decision or a board vote that, while public, is usually not controversial. There may be development finance programs for which the transit agency lined up commit- ments or support prior to developer solicitationâfor example, by working with an economic development or housing finance agency to prioritize the JD project and secure a commitment, subject to the developer selection and project details. If the developer is to step in as the appli- cant, the hand-off (and the transit agencyâs continued support) needs to be transparent to the funding agency. As discussed in ChapterÂ 7, there are also a variety of programs that can support the public infra- structure and site development side of the projectâfor example, infrastructure grants, tax incre- ment finance bonds, and brownfield remediation programs. To the extent that such programs are integral to the feasibility of the JD project, it is essential for the transit agency to have secured at least preliminary commitments prior to developer solicitation and to have so indicated in the RFQ or RFP. The JDA could assign responsibility for concluding the application and approval to either the transit agency or the developer, depending on the program involved.
Executing a Joint Development Project 67Â Â Design Review The JDA must address a key asset stewardship issue: the extent to which transit agencies review the designs of their JD partners and supervise their construction activities. In the survey of transit agencies, the following practices emerged with respect to design review. To the degree applicable, the JDA should provide for a structured review process at the three standard stages of design: schematics, design development, and final plans and specifications. The developerâs obligation is to follow the substantive and procedural design standards set forth by the transit agency. The transit agency, in turn, should commit in the JDA to fair and reasonable turn-around at each stage of review. The intent is not to add unnecessary time, cost, or uncertainty. The following are some of the best practices of design review: â¢ If the project includes construction near a guideway, viaduct, tunnel, or station structure, the transit agency should apply engineering standards commensurate (in content and rigor) with the degree of horizontal or vertical proximity to the affected facilities. Transit agencies take these responsibilities seriously; as described below in SectionÂ 5.4, many publish an adjacent construction manual that the developerâs design team is required to incorporate in the projectâs final plans and specifications. These standards form the basis of design review. â¢ If the developer is to design and build a facility for the transit agency, or commercial and common areas within a station, its design will be governed by the agencyâs design criteria, and review is typically detailed and comprehensive. â¢ With respect to other residential, commercial, or mixed-use development on transit property, the prevalent patternâarticulated by about half the agencies in the surveyâis to review the design for impacts on safety, operations, and accessibility. Agencies emphasized that these reviews are limited to transit-related concerns, so as not to duplicate or intrude on those done by local zoning and building officials. (As one respondent said, âwe donât do plumbing or aesthetics.â) Several agencies stated that their reviews address the consistency of the master plans, site plans, and massing with the plans approved in the selection process, as modified in the JDA. When the JD site is part of an approved station area TOD plan, the agencyâs design review should address consistency with that plan as well, particularly in areas like the integration of pedestrian and bicycle circulation with the surrounding streets, placement of parking, or design of street lighting. This may be achieved in concert with the local jurisdiction if they are reviewing these aspects as well. â¢ Some agencies go further, indicating that they conduct a more comprehensive design review, participate in a comprehensive review by local officials, or are actively working to achieve either of these methods. The best practice emerging from the transit agency survey, as well as the experience of the research team and project panel, is the hierarchy of design review priorities illustrated in FigureÂ 31. The bottom entryâdetailed architectural review of JD buildings beyond safety, operations, accessibility, and consistency with the approved proposalâis not and need not be typical. Such review, if undertaken, should be focused on visually prominent buildings in close proximity to the station, and should complement, rather than duplicate, the review conducted by local zoning and building officials. The Real Estate Closing The JDA establishes the key elements of the closing: â¢ A description of the conveyance that will be executed at the closing and the form of the convey- ance instrument (the ground lease, deed of sale, joint venture agreement, or LLC agreement);
68 Guide to Joint Development for Public Transportation Agencies â¢ The stage of project development to be achieved at the time of the closing; this discussion assumes the common (but not universal) practice of conducting the closing when the project is ready for construction; â¢ The closing conditionsâa series of requirements for which the responsible party must produce satisfactory documentation as a precondition for the closing to take place; and â¢ The deadline for the closing to occur (sometimes called an outside closing date) and the conditions under which it can be postponed by either party without constituting a default. The closing conditions are the heart of the matter. For construction to begin within a short time after the closing, all external approvals have to be in place; all necessary funding has to be in-hand or committed to the transit agencyâs satisfaction; to the degree the transit agency conducts a design review, that process has to have concluded with an approved design; the general contractor has to be under agreement and ready to mobilize, with a work plan approved by the agency and consistent with its adjacent construction standards. There are also conditions that the transit agency is required to satisfy before the developer is obligated to close. TableÂ 4 lists a sample set of closing conditions. Closely related to the closing is the documentary structure of how the JDA and the conveyance instrument (the lease, deed, or other agreement conveying the development rights) are related to each other. All the rights and obligations in force after the closing must be spelled out either in the JDA (in which case they are provisions that survive the closing), in the conveyance instru- ment, or in separate covenants.4 The JDAâs own language may establish that it will be superseded Figure 31. Hierarchy of design review priorities.
Executing a Joint Development Project 69Â Â by the conveyance instrument in its entirety, or that it will be superseded except for certain provisions specifically designated as surviving the closing. The final project description and recitation of financial terms are generally set forth in the conveyance instrument, since they represent the core of the conveyance and in many cases will have changed since the JDA. 5.4 Overseeing Construction after Closing The conveyance instrument should provide a construction schedule to which the developer commits. This begins with a deadline to commence work within a specified time after the closing (sufficient for the general contractor to mobilize). Once work has begun, the developer is obligated to âdiligently prosecute construction in accordance with final plans and specifica- tions to completion of the specified improvements.â A deadline for substantial completion should be established as well. As discussed in SectionÂ 5.5, the failure of the developer to adhere to these deadlines, depending on the extent of delay and the reasons for it, could be consequential. The conveyance instrument should also describe the substantive and procedural aspects of the agencyâs construction oversight. The degree of oversight should broadly reflect the design review priorities: â¢ Construction including, in contact with, or in immediate proximity to a transit facilityâ particularly a viaduct, subway tunnel, portal, at-grade guideway, busway, or overhead power lineârequires the highest level of oversight because of the combined risks of service inter- ruption and accidental injury and damage. Conditions Required of the Developer No default under the JDA Current financial statements Legal opinion(s) validating the development entityâs corporate powers Evidence of sufficiency of funds* Completion guarantee with bond, escrow, and/or contractor default insurance* Final plans and specifications approved in writing by the transit agency* Maintenance of traffic, maintenance of service, and/or interim operational plans, as applicable, approved in writing by the agency Site-specific work plan for construction near the station, consistent with adjacent construction standards and approved in writing by the agency All required regulatory approvals to construct and operate the development project Executed construction contract and architectâs agreement Title survey and commitment Any easements or covenants for the benefit of the agency, ready for recording Conditions Required of the Transit Agency No default under the JDA Ability to convey the site as described in the JDA, free of any encumbrances other than those acknowledged therein Approval of any documents listed above, as applicable FTA concurrence in the JDA (if applicable) *These conditions apply to the private development and to any transit improvements for which the developer is responsible. Table 4. Sample listing of closing conditions.
70 Guide to Joint Development for Public Transportation Agencies â¢ Construction of buildings or other facilities that will belong to the transit agency or be used by it must be consistent with the design criteria and construction contract documents approved by the agency. â¢ The conveyance instrument should prohibit any interference with transit operations unless approved by the agency. â¢ Any construction in and around a station or transit center may create detours and diversions for pedestrians, buses, and automobiles. Maintenance of traffic and access should be addressed in the construction documents and managed so as to minimize inconvenience to passengers and others. â¢ Similarly, construction may create impacts on neighbors and abutters through noise and vibra- tion, traffic, fugitive dust, and other common construction conditions. The construction and permitting documents will normally have prescribed appropriate mitigation measures, and while these are the developerâs responsibility, the agency has a strong interest in seeing them implemented. Virtually all the agencies surveyed for this guide have established policies and procedures for review of adjacent construction, whether JD on agency land or third-party construction on land owned by others. These policies typically include design criteria to be incorporated into the developerâs final plans and specifications, as well as detailed practices, both procedural and physical, to be observed during construction. Many transit agencies publish adjacent construction manuals in which all relevant standards and procedures are compiled. Examples include LA Metro, WMATA, the MBTA, the Miami- Dade Department of Transportation and Public Works (for Miami-Dade Transit), the Chicago Transit Authority, and Vancouverâs Translink.5 For heavy rail systems like these, with stations and guideways in immediate proximity to potential development sites, best practice has evolved to encompass a structured design review and construction oversight process, based on the adjacent construction manual, using dedicated staff and consultant resources.6 Adjacent construction standards are also important for surface light rail, streetcar, over- head catenary bus, or dedicated guideway bus rapid transit services, albeit at a lesser degree of complexity. Examples of adjacent construction manuals for such corridors include the Denver RTD standards for construction in close proximity to light rail tracks and Translinkâs approval program for construction near overhead trolley lines.7 The construction oversight process set forth in the JDA should reflect the specific project in question. As a closing condition, the developer should be required to deliver a site-specific work plan, approved in writing by the agency. The items in TableÂ 5 represent projects of at least moderate scale and complexity, including construction in close proximity to an operating transit facility at stations with substantial passenger activity and close neighbors and abutters. For projects lacking these factors, the corresponding oversight requirements would be simpler or not applicable. 5.5 Durable Governance Framework The contractual relationship between transit agency and developer will extend not only beyond the closing but beyond construction. The durable framework of rights and obligations governing this extended relationship is outlined in this section. In general, these issues are addressed in the conveyance instrument (the lease or deed executed at closing); they may also be anticipated and summarized in the JDA. All of the topics discussed here are applicable to long-term ground leases. In an outright sale, some topics (particularly the developerâs on-going obligations and the issue of lease subordination) would not apply.
Executing a Joint Development Project 71Â Â Management of the Project â¢ Preconditions for the construction forces to gain access to the site â¢ Evidence of required insurance, certificate of indemnification, and documentation of all required plans and procedures â¢ A construction schedule with deadlines for substantial and final completion â¢ Requirement to submit a full set of as-built drawings on completion â¢ Standards and procedures for substantial completion and acceptance Field Oversight of Construction â¢ Coordinating meetings attended or led as appropriate by the agencyâs construction oversight project manager or ownerâs representative, keeping affected departments in the loop â¢ For facilities built for the transit agency or in immediate proximity to operating transit facilities: periodic inspection to ensure site safety, construction quality, conformity with the approved design, and protection of agency assets â¢ Adherence to required clearances, load limits, and other engineering parameters Site Safety During Construction: Project-Specific Safety Plan â¢ Site security (fencing, electronic surveillance, patrols, lighting, badging, etc.) â¢ Safety training for all personnel â¢ Design and operating protocols for cranes â¢ Emergency vehicle access and egress at all times â¢ Requirements for barriers, overhead protection, and shielding â¢ Limits of operations â¢ Flag protection and escorts Monitoring Program â¢ Preconstruction survey â¢ Instrumented monitoring of existing structures to ensure that no horizontal or vertical movement has occurred Maintenance of Operations and Access â¢ Detailed plan for maintenance of rail and bus service at the station, including drop-off, park & ride if applicable; interference with transit prohibited without agency approval â¢ If applicable, approved diversions of service or adjustments to parking and site access â¢ Maintenance of ADA-compliant accessibility throughout any pedestrian detours or temporary relocation of platforms â¢ Maintenance of traffic on-site and, if applicable, off-site Impacts on Abutters and Neighbors â¢ Construction-period impacts to surrounding communities identified and addressed in a written mitigation plan and in the construction documents â¢ Compliance with mitigation measures required as part of any environmental review, entitlement, or permit Force Account â¢ Provisions for the agency to use its own forces for certain flagging and detour operations and for specified construction on operating trackage or guideways â¢ Requirement for the developer or contractor to execute and fund a force account agreement to that effect Table 5. Common features of joint development construction.
72 Guide to Joint Development for Public Transportation Agencies If the development entity is a joint venture or LLC in which the transit agency and the developer are members, their rights and obliga- tions to each other (and those of any third-party investor member) are set forth in the joint venture or LLC agreement, which supersedes the JDA. The issues outlined here generally apply within that framework. Control Issues Even if the JD property is leased for 99Â years or sold outright, the transit agency retains certain interests in how the property is used and whether the developerâs interests can be sold or assigned. These issues relate to the agencyâs transit mission as well as its commercial position in the project. Satisfactory Continuing Control. If the project is an FTA-Assisted Joint Development, as described in ChapterÂ 6, then FTA will have already reviewed and approved, as a precondition to executing the JDA, a set of provisions to ensure âsatisfactory continuing control of the property for its originally authorized purpose.â The agreed-upon JD, once approved by FTA, becomes part of the authorized transit project. FTAâs concerns include an assurance that the JD project in which they have concurred will actually be implemented and that the transit agency, as FTAâs grantee, will not lose con- trol of the property through future third-party transfers. Depending on the specific nature of the project, satisfactory continuing control may also involve construction period impacts on the transit facility and on-going access by the transit agency for maintenance and safety. Satisfactory continuing control can be achieved through a variety of legal mechanisms in the lease, deed of sale, joint venture, LLC agreement, accompanying easements, or recorded covenants. If there is no FTA interest in the property, or if the FTA interest is extinguished by outright sale as a disposition of excess property, then the âsatisfactory continuing controlâ requirement does not arise. Nonetheless, the transit agency should pursue similar safeguards in its own right and under applicable state law.8 These safeguards are as follows: Limitation of uses. The agreements should specify that the property can be developed and used only for the activities allowed in the project plan in effect as of the closing. Any flexibility to vary the uses without agency approval should be carefully circumscribed in the document, and any change beyond that should require the agencyâs written agreement. (In FTA-assisted JD proj- ects, such changes would presumably require FTA approval as well.) Assignment or sale. The agreements should address issues of assignment or saleâan area in which both parties have important rights to be spelled out and protected. There are certain types of assignments and transfers that developers are allowed to make as a matter of course, in order to address their business goals and attract capitalâselling an equity share to an investor, assigning a mortgage interest to a lender, selling or leasing space in the project to end users. On the other hand, if the developer seeks to sell its leasehold interest in the site, or to sell the buildings during or after construction, or to change the controlling interest in the devel- opment entity itself, that is another matter. While such transfers are everyday occurrences in the development market, the transit agency has an interest in knowing that the developer it selected, and with whom it negotiated the JDA and related agreements, will not be replaced Durable Governance Framework Control Issues â¢ Satisfactory continuing control (if an FTA/JD project) â¢ Limitation on change of uses â¢ Limitations on assignment or sale â¢ Transit and commercial decision-making â¢ Limits on subordination Developerâs On-Going Obligations â¢ Financial payments to transit agency â¢ Insurance, indemnification, and safety protocols â¢ Reverters and purchase options â¢ Defaults and remedies
Executing a Joint Development Project 73Â Â at a sensitive time in the life of the project without the transit agencyâs approval. While the full variety of circumstances cannot be captured here, some broad guidelines emerge from practice: â¢ Prior to the closing, an outright transfer or assignment of the development interest, or a material change in the composition of the development entity, should not be allowed without the agencyâs written approval. This approval should be at the agencyâs discretion. â¢ During construction, when the risk of the project being left half-built must be minimized, similar provisions should apply. Closely related is the issue of what remedies are available at the transit agencyâs initiative if the developer is unable to continue during construction (see Defaults and Remedies). â¢ Once the project is completed and has received a certificate of occu- pancy, if the property was sold to the developer (who now owns the land and buildings outright), they are generally allowed to resell, preferably after a specified holding period. Any provisions relative to satisfactory continuing control or limitation on uses must run with the land and be assumed by the new buyer. In the case of a ground lease, the ability to sell or assign is more sensitive. Such transfers should require the transit agencyâs approval; the question is whether that approval is discretionary or presump- tive (typically expressed as an approval that âshall not be unreason- ably withheld or conditionedâ). Even with presumptive approval, the agency should retain the right to reject a flawed or inappropriate transferee. Agencies may seek broader discretion, as well as a holding period before which the developer can sell or assign its interests. There is a balance at play: the agencyâs interest in controlling the entity with which it does business versus a developerâs interest in deciding whether to hold or sell after a reasonable time. If the development entity is a joint venture or LLC in which the transit agency is a member, the developer should not be able to sell the property, but only their own position in the joint entity. Responsibilities and decision-making. In some JD projects, transit functions and commer- cial activities are physically contiguous or intermingled; this often occurs in the development of multi-modal hub stations, described in ChapterÂ 8. Moreover, such projects may provide for the developer to design, build, or operate specific station components owned by the transit agency, as well as common areas used by transit customers. As described in ChapterÂ 3, the roles and responsibilities for each component should already have been addressed during the planning stage, but it is important that they be set forth in detail in the JDA and/or conveyance. In par- ticular, the responsibility for maintaining each componentâwhich may differ from the responsi- bility of designing or building itâshould be stated explicitly.9 It is equally important to specify the decision-making structure with respect to each component. Broadly speaking, decisions about transit facilities and operations should be controlled by the transit agency; decisions about commercial activities should be controlled by the developer, subject to the provisions on allowable uses, standard of maintenance, and orientation of retail areas so as to reinforce transit use. There should be a reasonable process for mutual advice and input, and an appropriate governance mechanism for common areas and other station components that serve both transit and development. Subordination. Subordination of ground leases has become less typical in recent decades, and it is best practice for transit agencies (and other public landlords) to avoid it. Subordination is a provision that places the landlord (in this case, the transit agency) behind the development lender in the event of a default. Normally, if the developer (as tenant) defaults on its ground lease The agency has an interest in knowing that the developer it selected, and with whom it negotiated the JDA, will not be replaced at a sensitive time in the life of the project without its approval. Decisions about transit functions should be controlled by the transit agency.
74 Guide to Joint Development for Public Transportation Agencies payments, the landlord has the right to terminate the lease and reclaim the land. If the developer (as borrower) defaults on its loan payments, the lender has the right to foreclose. In a fully subordinated ground lease, the landlord agrees to be in second positionâthat is, to defer to the lender by agreeing not to terminate the lease if the developer defaults on its lease payments. This facilitates underwriting the loan but places the landlord at the fundamental risk of losing the land through foreclosure. This arrangement is particularly problematic for public land owners. A variety of market practices can afford the lender some protection in case of a ground lease default without granting a traditional subordination.10 In considering subordination or any alternative to it, staff should consult agency policy, state law, and, if applicable, the FTA region. (As noted in ChapterÂ 6, FTA does not rule out subordination in FTA-assisted JD projects; however, a subordinated lease would have to protect FTAâs satisfactory continuing control requirement.) Subordination might be considered when a JD project is being undertaken to jump-start development in a weak market or a marginal district. However, the straightforward alter- native in that case is to forego the ground lease and sell the property instead. For similar reasons, if the conveyance is to be an unsubordinated ground lease, the lease payments might be rolled up into a single lump-sum at closing, removing the possibility of defaulting on future payments. An unsubordinated lease may require higher debt service payments by the developer (or a lower debt-to-equity ratio for the development project), which may in turn be reflected in lower base rent payments to the transit agency. However, from the transit agencyâs perspective, this tradeoff eliminates the risk of foreclosure on the land. If the project succeeds, the lower base rent may be recouped in the structure of downstream payments, which is addressed next.11 Developerâs On-going Obligations If the JD site is conveyed by long-term ground lease, or if the transit agency stays in the deal through a joint venture or LLC, then the developerâs on-going obligations with respect to finan- cial payments and other matters are central to the JDA and its successor agreements. Financial payments to the transit agency. From the transit agencyâs standpoint, one of the principal advantages of a long-term ground lease is the ability to participate in the projectâs downstream performance. Ground lease structures vary considerably among agencies, and sometimes among individual projects within an agencyâs portfolio. A common but not universal structure includes three tiers: â¢ A base rent, modified only by an inflationary escalation factor or an automatic reappraisal in a specific future year;12 â¢ A performance rent, based on a percentage of the projectâs gross revenue or, less commonly, its net revenue; and â¢ A participation stake in future capital events such as a refinancing or an allowed sale of the leasehold or improvements. Undertaking this type of lease requires both the capacity and the appetite to monitor the projectâs performance on a long-term basis. The choice between a base rent that automatically escalates based on a standard index or one that remains flat until a scheduled reappraisal should reflect not only the paper comparison of net present values, but the relative complexity of It is best practice for transit agencies to avoid subordinated ground leases. A Three-Tier Ground Lease Structure â¢ Base rent with escalation â¢ Performance rent as percent of gross revenue â¢ Participation in future capital events
Executing a Joint Development Project 75Â Â a reappraisal process in which the parties might disagree over the results. Similarly, basing the performance rent on gross revenue, rather than a higher percentage of net revenue, is the preferred practice because while reporting and monitoring are still involved, the complex and potentially disputable calculation of net revenue is avoided. Similarly, participation in future capital events assumes that the agency will have, at an unknown future time, the capacity to review and evaluate a complex transaction to which it will not directly be a party. It is recommended that the lease require the developer to notify the agency in advance of an anticipated capital event and to pay a capital event fee sufficient to cover the specialized financial, commercial, and legal consulting support the agency will need. Beyond these practical issues, the lease structure should reflect market conditions. A ground lease in a mature market might rely largely or entirely on an escalating base rent. In a new or emerging market, however, where values are expected to grow structurally, a lease including future participation is more appropriate. If the development structure is a joint venture or LLC, the agreement must establish the transit agencyâs pro rata equity share and specify how that share of project cash flow is calculated and when it is distributed. While the agency, as a partial owner, would participate in any capital event, the agreement must also define whether, when, and how the joint venture or LLC can be dissolved and which assets and rights the transit agency would recover at that time. Other on-going obligations. A long-term ground lease, joint venture, or LLC agreement will typically obligate the developer to deliver other outcomes as well. These include payment of property taxes, maintenance of the property, and in some cases, as noted above, operation and maintenance of station components in which the transit agency has an interestâfor example, a concourse and waiting area, a shared-use parking garage, or landscaping and snow removal on sidewalks or plazas. The agreement should not only enumerate these obligations (and any required standards of care and quality) but provide a mechanism for the transit agency to monitor and enforce performance. A key obligation arises if the developer has agreed to provide a specific amount of affordable housing as part of the project. This obligation may reflect an inclusionary requirement imposed by the local jurisdiction or the transit agency itself, or it may have been offered and negotiated as part of the selection or entitlement process. In either case, this is a long-term obligation, usually involving the income restriction of the affected units for a period of decades. The transit agency is unlikely to develop in-house expertise in this area and generally need not do so. Enforcement can be written into the JDA in several ways, including a requirement that the developer periodically document and certify its compliance; this documentation can then be audited by a specialized consultant representing the transit agency. Even with such a provision in place, however, the effective enforcement usually comes from the public lender, investor, or tax credit allocating agency involved in financing the affordable units, or from the zoning jurisdiction if either a local inclusionary requirement or zoning relief was involved in the project. Risk management. From the transit agencyâs standpoint, all the provisions and strategies outlined in this chapter can be understood as forms of risk avoidance and mitigation. There is a particular priority on protecting the agency, its customers, and the public from damages that could arise from the JD project. The discussion of construction oversight is in significant part a discussion of safety protocols and risk avoidance, but those concerns are not limited to the construction period or to possible construction accidents. The JDA should mandate that the developer, at every stage of the project, maintain safety protocols appropriate to that stage, indemnify the agency against harm that might arise from the
76 Guide to Joint Development for Public Transportation Agencies developerâs presence and actions, and maintain insurance policies of prescribed coverages and levels. The insurance requirement alone, while necessary, is generally not sufficient to protect the agencyâs interests. Reverter and purchase option. Long-term ground leases include a reverter. At the end of the term, the full control of the land as well as ownership of the buildings and other improve- ments automatically reverts to the landlord. This is a definitional feature of ground leases, and the lengthy term reflects the need to finance the original development and any subsequent sale or refinancing. The reverter language should address the sequence of events culminating in the actual termination and reversion. Less common, a long-term ground lease may include an option for the developer to purchase the underlying property at some future time. If so, the lease must include all appropriate pre- conditions for the developerâs exercise of that option (in effect, a set of contingent future closing conditions), as well as all changes in the deal structure that would be triggered by that event. In particular, the option must specify how the future purchase price would be determined. Defaults and Remedies Finally, the JDA should provide a deal-specific structure of defaults and remedies. Common to most complex agreements, default pro- visions establish what each party is entitled to do if the other party breaches the contract, makes an untrue representation, is declared bankrupt, or fails to meet a specific obligation or deadline, financial or otherwise, to which it is bound by the agreement. These failures or breaches are events of default, either immediately or upon the failure of the offending party to cure the issue at hand. Agreements typically grant that under certain conditions, such as a force majeure event, the failure is not attributable to the party in question and a default is not triggered. Force majeure (superior force) clauses typically list events like âacts of Godâ (fires, earthquakes, or floods), war, revolutions, and epidemics or pandemics. In crafting the nexus of defaults and remedies, the transit agency and the developer should adapt common practice to the specifics of their transaction. The procedural framework generally includes the following steps or a variation of them: â¢ A notification to the defaulting party that a default has occurred, or will occur if the matter in question is not cured (the agreement should establish which events constitute a default immediately and which constitute a potential default);13 â¢ A defined period in which the defaulting (or potentially defaulting) party has the right and duty to cure the default, and a provision allowing the cure period to be reasonably extended as long as the party is diligently pursuing the cure; â¢ If the defaulting party is unwilling or unable to cure the default, the right of the other party to terminate the agreement without further obligation on its part. If the developer is the defaulting party, the transit agency may terminate the agreement and, if the closing has already occurred, reclaim the development site. If the transit agency is the defaulting party, the developer may terminate the agreement without further obligation or sue the agency to compel specific performance of the obligations in question. (As noted previously, in projects with long-term leases, it is essential that the lender be notified in the event of a lease default and afforded the opportunity to step into the developerâs shoes and cure the default.) An event of default may occur if a party: â¢ breaches the contract â¢ makes an untrue representation â¢ is declared bankrupt â¢ fails to perform a specific obligation in accordance with the schedule. Such obligations may involve financial payments, real estate closings, design or construction milestones, or other aspects of the contract.
Executing a Joint Development Project 77Â Â The framework of defaults and remedies applies, in one way or another, at all stages of the JD project: â¢ Between the JDA and the closing, the developer could default by failing to advance design, financing, permitting, or other closing conditions, eventually failing to meet the outside closing deadline or any extension. â¢ At any time after the closing, the developer could default by failing to make scheduled lease payments, failing to meet any other substantive or procedural obligation, or by seeking to transfer its interests without the agencyâs approval in violation of the agreements. â¢ Following the closing, the developer could default by failing to meet the construction commence- ment deadline. During construction, the developer could default by failing to continually and diligently prosecute construction of the project, or by being declared bankrupt, or by separately defaulting on its mortgage payments, causing the lender, in the worst case, to take control of the leasehold and the partially built improvements. The transit agencyâs rights, short of terminating the JDA and the ground lease, should be clearly spelled out. â¢ If the project consists of multiple phases, the JDA establishes whether the closing will involve the conveyance of the entire site or only the portion associated with Phase 1. These alternatives are applicable whether the land is being ground-leased or sold. If the closing covers only the Phase 1 parcels, the JDA also sets the terms under which the developerâs exclusive right to acquire and develop the future phases is preserved. In general, each future phase is assigned its own closing, with closing conditions, out- side closing dates, and other provisions similar to those already described. If the developer defaults on the closing for Phase 2, the agency may terminate the agreement with respect to that and any subsequent phases. The agency assumes the reciprocal obligation not to sell, lease, or otherwise encumber the parcels reserved for the future phases. A Final Note on Governance Conditions change over time. The care and effort on the part of a transit agency to construct a durable governance framework as described above should not imply a categorical unwillingness to entertain amendments to the relevant agreements over time. Such amendments could arise from changes in market conditions, transit conditions, or both, and could be requested by either party. Any material change in a JDA, long-term lease, joint venture agreement, or continuing control covenant would require a vote of the agencyâs governing board, and in some cases FTA approval as well. That said, the parties to an agreement always have the right to negotiate future amendments in their mutual interest. Endnotes 1. Other agencies avoid the interim step of a term sheet, especially if the terms were spelled out in detail in the solicitation process. This might be the case if a best and final offer was used, requiring specific and binding terms. Conversely, in a simple project with a single property conveyance, an agency might opt for a sequence that goes directly from a term sheet to the lease or deed of sale itself, without the need for a distinct JDA. 2. Additionally, a separate, companion effort commissioned by TRB (TCRP J-05, Task 18-04) is focused spe- cifically on drafting JDA for FTA-assisted JD projects. 3. BART, Lake Merritt; AppendixÂ I. 4. JD conveyances may be accompanied by specific, enforceable agreements known as covenants. A covenant does not convey a property right; however, the subject matter of a covenant may be critical to the underlying conveyanceâcontaining, for example, the partiesâ obligations with respect to satisfactory continuing control or to allowable end-uses of the premises. Covenants associated with a lease are generally included as provi- sions of the lease itself; those associated with a sale are generally recorded alongside the deed. 5. MBTA: https://www.mbtarealty.com/wp-content/uploads/pdf/MBTA-TOD-GUIDLINES-FOR-ODCs- April-2018.pdf; LA Metro: http://media.metro.net/projects_studies/joint_development/images/
78 Guide to Joint Development for Public Transportation Agencies mad_handbook_2018-0509.pdf; WMATA: https://www.wmata.com/business/adjacent-construction/ upload/ACPM-Rev-5a-09-21-15.pdf; Miami-Dade: https://www.miamidade.gov/procurement/library/ dtpw-adjacent-construction-manual.pdf; CTA: https://www.transitchicago.com/assets/1/28/CTA_Adjacent_ Construction_Manual_2017-Nov.pdf; Translink: https://www.translink.ca/-/media/Documents/about_ translink/doing_business_with_translink/real_estate/aid_guide_for_developers.pdf?la=en&hash=96C7D 7CB47641220472804C253991F3EACC804AE. 6. Examples include CTAâs Adjacent Construction Division, the TOD Group in the MBTAâs Capital Delivery Department, Translinkâs Adjacent and Integrated Development Program, and WMATAâs âJDACâ (Joint Development and Adjacent Construction) Review Program. 7. RTD: https://www.rtd-denver.com/sites/default/files/files/2018-08/building-in-close-proximity-to- existing-light-rail-tracks-03-02-16.pdf; Translink: https://www.translink.ca/-/media/Documents/ about_translink/doing_business_with_translink/real_estate/2018-01-24-TOH-AWP-Project-Consent- Process-Guide-for-Project-Owners.pdf. 8. As explained in ChapterÂ 6, âFTA-Assisted Joint Developmentâ and âdisposition of excess propertyâ are distinct, mutually exclusive alternatives under federal law and guidance. 9. In the case of a joint venture, limited partnership, or LLC representing the developer and the transit agency (as sometimes used in hub station projects), the responsibilities should be embedded in agreement, along with the decision-making protocols described below. 10. These include the critical requirement that the lender be notified in the event of a lease default and given an opportunity to step in and cure the default on behalf of the developer. There are also forms of partial subordination, in which the lease payments are subordinated to debt service but the lender cannot foreclose on the land. 11. For a recent summary (2019) of the subordination issue, with particular reference to public landlords, see James D. Whalen, American Bar Association: https://www.americanbar.org/groups/real_property_trust_ estate/publications/probate-property-magazine/2019/march-april/on-financing-unsubordinated-ground- lease-the-twentyfirst-century/. See also the discussion in Metro Transit: https://www.metrotransit.org/Data/ Sites/1/media/tod/groundleases.3.30.2017.pdf. 12. The base rent should generally reflect the FMV of the project in unit termsâthe value per residential unit or a given type or per square foot of commercial use. 13. The parties may wish to treat some categories of default as potentialâtriggering the notification and cure period but not an actual default unless the offending party fails to cure it. The right to cure generally applies to both immediate defaults and potential defaults.