Real Estate: Rearranging the Area

Commercial real estate as a practice area has radically changed in recent years, as insatiable demand for downtown living ushers in a new wave of mixed-used developments.
Branded condos like Toronto’s Lagerfeld Art Shoppe project mix real estate and IP licensing
Branded condos like Toronto’s Lagerfeld Art Shoppe project mix real estate and IP licensing

IN CANADA'S LARGEST CITIES, the downtown landscapes are changing. Many Millennials and Gen-Xers have no interest in being shackled to the suburb and a daily commute. They are more than happy to forgo large single family homes with yards in favour of downtown living and its proximity to restaurants, supermarkets, stores and even the office. They’re being joined in some cases by Baby Boomers who, kids long gone, are looking to scale down and want many of the same perks. That’s creating a uniquely big-city problem. Most big-city downtowns have a finite amount of downtown space but face an insatiable appetite for downtown housing.

The sharp rise in demand is making cranes a regular sight in many downtown horizons as new condos become an unstoppable force. And condos don’t mean just residential units any more — a condo can be residential units stacked over retail. It can be residential units and retail stacked on top of a hotel. It can even be all three stacked on top of multiple floors of parking because, with land so scarce, who can afford to keep an old-style paved parking lot anymore?

In Toronto, the message is coming through in discussions between developers, lawyers and urban planners who understand the conundrum. Some days, it seems the sky is the limit — and that’s not really a problem. The “One” condo at Yonge and Bloor in Toronto will be 340.6 metres high when completed, with 76 storeys of residential condominiums sitting atop 85,000 square feet of retail space.

Where city planners used to fight height outside certain pockets like the financial centre, mega-projects like the One signal their priorities have altered. “There’s certainly been a shift away from [a focus on] height and density,” says Tara Piurko, a partner in the commercial real estate group at Blake, Cassels & Graydon LLP in Toronto. The focus has shifted to “urban design” says Piurko, who works directly with urban planners in both the public and private sectors on behalf of her developer clients, helping them negotiate approvals to things like official plan amendments and zoning bylaw amendments.

Urban design is not so much about the way the building looks as how it interfaces with the community. It encompasses elements like existing and planned infrastructure, whether the new development includes community services or facilities, how it deals with transit and transportation and even plans for things like the disposal of sanitary and storm waters. Planners want to know as much about those kinds of details as they do about a building’s outer shell. With undeveloped downtown land scarce, she says, planners “are encouraging developers to push the envelope. We’re seeing innovation and some amazing things happening in the development world.”

This innovation is happening in places you wouldn’t normally expect: so-called “tight sites” that might have been thought of as too small to house a multi-use tower, sites adjacent to rail tracks or even designed and built over rail or subway tracks below. Piurko says that, in pushing that envelope, development is effecting positive change, decreasing our reliance on cars. “In a nutshell, I’d say, increasing density is breeding innovation within the industry. The shift away from the focus on height I see as very positive.”

All this scarcity-driven innovation has important implications for commercial real estate lawyers — how they draft contracts, how they advise in negotiations with urban planners, how they ensure compliance with new regulations, even in how they define their residential/commercial practice.

IN THE PAST, to a commercial real estate lawyer, working on a downtown transaction usually meant helping a client acquire an income-producing property through a purchase-and-sale agreement, which may or may not have required balance-sheet or a third-party financing. What’s happening today ­­­­— and it’s the same whether it’s a small or large real estate company, a public or private entity, a REIT or pension fund — is that developers are tearing down single-purpose buildings or building them up to turn them into mixed-use towers.

“Not only are they developing existing properties into new mixed-use properties, but a lot of them don’t want to shoulder all the risks themselves, so they’re partnering with other real estate entities who may have experience in a different area,” says Bram Green, a commercial real-estate practitioner at Goodmans LLP. “So your client’s not just going to buy a property and development anymore, they’re going to partner with developers that bring in complementary expertise.”

For the lawyers, that means their practice now involves not only helping the client buy a property but also negotiating joint ventures to set out terms about things like who will be managing the development process, and who will manage the stabilized income-producing component of the project. So they have to know how to handle joint ventures, negotiate limited partnerships and co-ownership agreements, draft development-management and property-management agreements — all sorts of things not contemplated in the past, a combination of contract law, civil law and real-estate law.

Jim Hilton, practice group leader of the real estate group at Blakes, says the more elements you add to a development, the more complicated the work becomes. “Cost-sharing agreements, various reciprocal-rights agreements, easement agreements all make for a much more complex development. That’s where the sort of work commercial real estate lawyers do branches out — then we’re doing agreements in that sphere that maybe we wouldn’t be touching in normal residential condominiums.”

BRAND AFFILIATION HAS BECOME another hot selling point for mixed-use condos. In Toronto, at Yonge and Eglinton, Karl Lagerfeld is teaming up with a developer to create the “Art Shoppe” condos, which will, when it’s complete, feature the high-end decor outlet on ground floor. In Montréal, meanwhile, the cityscape around the Bell Centre, home of the Montréal Canadiens — and mecca for many Montréal sports fans — is almost unrecognizable.

Once full of drab old mid-rise office buildings, the area is now dominated by the Tour des Canadiens, a 50-storey mixed-use complex attached to the hockey rink and partly owned by the team. It includes 552 condos, 13 floors of parking and a large sports bar on the ground floor. It sold out within three months. It was so successful, a second 27-storey sculpted glass tower with 438 condos has been started. In both, residents will enjoy priority bookings for Canadiens hockey tickets and access to training sessions, among other privileges.

“When you look at where it’s located — it’s hard to get there by car — the size of the units, and the price, it’s amazing it can have that kind of traction, but it does,” says Elias Benhamou, senior partner in the commercial real estate and banking practices at Davies Ward Phillips & Vineberg LLP. Some units are just 500 or 600 square feet — not unusual to Torontonians or Vancouverites, but newish for Montréal where, 10 years ago, “you didn’t even see a single crane on the horizon.”

Linking a development to an existing brand adds to the work, he says, requiring lawyers to draft an IP licence agreement between the promoter using the brand, “who wants to secure the names and brands for the life of the project,” and the brand’s owner, “who wants to protect its rights against any wrongful use.”

Whether they have high-profile affiliations or not, similarly sized and priced mixed-use developments are going up in the city and, what’s notable, says Benhamou, is the increase in the amount of foreign money buying into the new buildings in the Montréal condo scene. He and other real estate players agree Montréal has seen a bump in interest from Chinese buyers, with the pace picking up noticeably since Vancouver announced a new 15-per-cent tax on non-citizens and non-permanent residents buying property in the city. “We see mostly Asians, mainly Chinese, and people from the Middle East coming in and buying blocks of condos which they won’t necessarily live in. Maybe they’ll rent, maybe family members or students will occupy them — it’s a way of investing.”

Whenever multiple units are picked up by foreign buyers with no intention of living there, Benhamou says, the lawyers have to address in the condo declaration whether monthly rentals will be permitted; in some buildings, it’s only yearly rentals or no rentals at all. “Then there are also things like Airbnb issues and public-liability insurance concerns that also need to be addressed.”

In Toronto, Mayor John Tory hasn’t ruled out a similar tax on foreign nationals buying property in order to cool housing prices, saying he wants to study its effectiveness. Early indications are it’s working in Vancouver. The number of properties sold in August 2016 (the 15-per-cent tax was announced at the end of July) was down nearly 26 per cent over last year, according the Real Estate Board of Greater Vancouver, although prices remained sky high compared to the rest of the country.

A COUPLE OF YEARS AGO, the Vancouver law firm of Koffman Kalef LLP hosted a cocktail reception for business magnate Jim Pattison. Someone asked for his best piece of advice. You know what he said? Buy land, anywhere in BC’s lower mainland, it doesn’t matter where. Just get some land. Any who took his advice to heart must be very happy right now.

If urban scarcity were an issue that had brand managers and lobbyists, Vancouver would have to be its poster child. The price increases over the past three years have made it among the most expensive retail markets in the world. The spill-off to the commercial, apartment and industrial buildings and even bedroom communities of the lower mainland has seen an eye-popping increase in prices.

Because Vancouver is defined by mountains and water, the downtown peninsula is limited by its geographic boundaries. Planners are extremely protective of the “view corridors and shadow impact” on other buildings and public spaces, says Patrick Julian, who leads Koffman Kalef’s commercial real estate practice group. That means firm lawyers are negotiating with city lawyers and working directly with both architects and planning consultants on behalf of their clients.

Providing a new development doesn’t impact any of the 27 “protected-view” corridors, planners have been accommodating greater density by permitting higher buildings, says Julian, who sees that as a good thing. “What Vancouver really needs to do, if you’re looking at the next 50 or 100 years, is become more like Manhattan — eliminate all of the single-family homes and have multi-family developments. So we’ve got to look up, and we’ve got to look at density.”

Vancouver has just six high-rises over 92 metres, Julian says, the highest being the mixed-use Shangrila. At 197 metres, it towers over almost everything else. He believes there needs to be more height to relieve price pressure, and while planners are relaxing height requirements a bit, lawyers drafting agreements are caught in a constant battle “between height and the impact on views and shadowing.” If downtown Vancouver didn’t have the mountain and water views, it would have a lot more density, he says.

Like Toronto and Montréal, the result of growing demand on limited space is seeing aging “mom-and-pop businesses” and low-rise apartments being torn down to be replaced by mixed-used developments. But Vancouver’s urban planners don’t want the city’s heritage buildings wiped out in the process, so they’ve come up with an imaginative solution. Historic buildings are assigned a “density allocation.” That means, for example, if a developer buys a five-storey, turn-of-the-century apartment building and restores it, the developer will have additional density it can then sell to someone else. “Your reward for spending all that money is that the city says, ‘We’re going to give you 100,000 square feet of heritage density,’ which you can sell to other developers or qualifying sites so that they can build bigger buildings,” Julian says. “So instead of building a 20-storey building, they can build a 28-storey building.

IMAGINE A 36-STOREY DEVELOPMENT with a supermarket as part of the retail on the first two floors, 14 floors of offices, and 20 storeys of residential condos stacked on top and three floors of underground parking. Issues such as odours, loading docks and parking for retail customers (as opposed to residents, office workers or visitor parking) all have to be negotiated, managed and legally documented. It comes down to what belongs to whom, what is common space, how occupants share the cost of things like electrical systems that run throughout the development, who is responsible for what and how you manage it. Benhamou, of Davies Ward, says in some provinces “what you end up with is condo declarations within condo declarations within condo declarations.”

BC has also been particularly innovative in its legal treatment of such buildings. Under the province’s Land Title Act, developers filing plans for new towers can divide the floors up into “air space parcels.” Each parcel, while not on terra firma, is considered as if it were: land with registered title, deeds and all the same rights and easements. It’s just that the lots are volumetric cubes of air instead of land-based. “Twenty years ago you didn’t see them very often: today they’re a fact of life,” says Scott Smythe, leader of the real property and planning group in the Vancouver office of McCarthy Tétrault LLP. “When you don’t have much land left, you’ve got to build up.”

Take that 36-storey mixed-use development and put it in BC. The way it works is, developers can take the top 20-storeys of residential units and put them into one air space parcel that can be sold, mortgaged, leased or even subdivided into condo units if the developer chooses. The middle 14 floors of office space can be set up as a second air space parcel “or even four separate air space parcels if the developer wants,” says Smythe. Same with two floors of retail space and three levels of underground parking. “It can be whatever you want. It just depends on the developer’s vision.” Regardless of how the space is carved up, air parcel units require lawyers like Smythe to draft agreements on easements, mechanical equipment, utilities and boundaries.

Julian and Smythe both feel that because of its topography and protected-view and shadowing issues, downtown Vancouver will not be filled with 100-storey towers any time soon. Both see a lot of density and a lot of development money going into transit-oriented development — especially tied into the public transit that connects downtown Vancouver with the airport and to bedroom communities such as Burnaby, New Westminster and Surrey.

JULIAN POINTS TO MARINE GATEWAY as the “iconic blueprint” for the next 10 or 15 years. The allowable density for the five-acre site, on the edge of South Vancouver allows for over 300 condo units and 100 rental units. Its developers also included a main street with a Cineplex, a food store, a Starbucks “and all the retail you would expect.”

Marine Gateway is also billing itself as a hub for green jobs, with Westport Innovations, a Nasdaq and TSX-listed company that engineers natural gas engines and vehicles leasing more than 50 per cent of the development’s 14-storey office tower. The best part, according to proponents? Marine Gateway is the first SkyTrain station ever to come into South Vancouver directly from the airport. It will bring densification without all the usual road congestion that entails a residential pocket at the city’s edge.

For legal practitioners, transit-focused development brings additional legal work. For one thing, they require negotiating agreements with Translink, Metro Vancouver’s regional transportation authority. Smythe of McCarthy says the agreements “become more complex” where the transit station itself, as opposed to just the transit line, is integrated with the new development.

These kinds of developments are also changing the physical landscape, he says. Before Marine Gateway, there were some commercial strips in that area, “but not much to speak of. Now, all of a sudden, there’s nothing but towers. People want to live by transit. They don’t want to have to drive if they don’t have to.” There’s a lot more of that going on in a variety of bedroom communities, he says, including a “massive new development in Burnaby and around Brentwood. There are going to be thousands and thousands of new condo units all clustered in the vicinity of a SkyTrain.”

So densification in Vancouver is spreading far beyond the traditional downtown — it’s driving things out as well as up.

THE ADVENT OF MIXED-USE BUILDINGS as a response to the densification is not confined to Vancouver’s runaway real estate market but anywhere land scarcity and density is an issue. Where it is, it’s affecting not just the commercial real estate work but also the work on financing end.

Because the large mixed-used developments are also “for sure” blurring the lines between commercial and residential real estate work, it’s making it more difficult to finance some projects, says Elias Benhamou of Davies. Take a building with just a couple of floors of stores, then a hotel and condos on top. Not every lender lends on hotels, not every lender lends on residential, so you may have three different credit facilities each financing its own tranche of the development.

“We see that all the time. And it has to be documented because, should the lender foreclose on the hotel, for example, he wants to make sure he has the rights to use the front entrance, use the parking. So that’s making it more complex than it used to be. Each part of the development may also have different owners, adding another level of complexity.”

In Canada’s largest cities, most commercial real estate practitioners say demand for their services is sky high and has been for the past few years. But if there is one potential cloud on the horizon, it’s the prospect of rising interest rates.

If interest rates eventually do go up in any significant way, suddenly the cost of everything would go up and “that would have a real impact on real estate,” says Jim Hilton at Blakes. “For a major commercial project, if you’re suddenly paying two per cent or three per cent more interest on X number of dollars, to see the project through, my God, things start to become less viable for sure. Low interest rates have been a real blessing.”

In other words, while urban scarcity in Canada’s big-city downtowns is a fact of life, the developments that are being tailored to accommodate it could slow down. But even if rising interest rates stop the cranes temporarily, there’s no going back. Urban culture is changing, neighbourhoods that used to be delineated as either commercial or residential increasingly include bits of everything, and that is inevitably changing the relationship between municipalities, developers and business.

The city has evolved into a new kind of organism — one with components integrated as never before. Lawyers will also be forced to adapt, to write new contracts and navigate new relationships that form the connective tissue allowing this urban organism to thrive.

Sandra Rubin is a Toronto-based writer and strategic consultant.