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MIXED-USE PROJECT DEVELOPMENT PROCESS

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MIXED-USE PROJECT DEVELOPMENT PROCESS

    MIXED-USE PROJECT DEVELOPMENT PROCESS:

    FEATURES, PITFALLS AND COMPARISONS WITH SINGLE-USE

    PROJECTS

    12 Charles Y.J. Cheah and Kok Sang Tan

    ? Assistant Professor, School of Civil and Environmental Engineering, Nanyang Technological University, Singapore

    ? Quantity Surveyor, Shimizu Corporation, Singapore

    Correspond to cyjcheah@ntu.edu.sg

    ABSTRACT: In many urban cities, mixed-use development is becoming increasingly essential for the creation of an attractive and sustainable environment that promotes economic vitality, social equity and environmental quality. Due to the differences in scale, scope and intent, certain aspects within the project delivery process of mixed-use are not the same as “conventional” single-use projects. The objective of this paper is to highlight these aspects. Two cases in Southeast Asia serve to illustrate the uniqueness and challenges of mixed-use. In conclusion, the differences between mixed-use and single-use are evident in terms of the diversity of team members, the necessity of multiple market analyses, and a multi-layer (versus singlesource) financing structure. Finally, issues concerning ownership tangles, land assembly, planning and application procedures, investment criteria of institutions have been identified as major pitfalls.

    Keywords: Feasibility study; Financing; Mixed-use development; Planning

    The proponents of contemporary mixed-use promote 1. INTRODUCTION

    either a planned community, or suggest what the Urban

    In today’s urban and suburban development, mixed-use Land Institute calls “multiuse projects” (several uses

    development schemes are often promoted as essential within one or more buildings) in inner core areas. Put

    towards the creation and preservation of an attractive and simply, the name of the game has to be synergy all uses

    sustainable living environment. Designers and developers must function smoothly on an independent basis and in

    attribute the motivation behind such development conjunction with each other.

    schemes to the public’s desire for a community [1]. In Mixed-use development cannot be created or

    urban areas, the infill tends to be vertical, with retail, conserved without special efforts from the participants

    office, and residential stacked to maximize density. In involved in the project development. Currently, those

    suburban areas, broader and horizontal developments in parties involved in this type of projects developers,

    the form of town centers and traditional neighborhood investors, designers, constructors and tenants, commonly

    developments are flourishing. The propensity towards find mixed-use development more problematic and riskier

    adopting either a vertical or a horizon scheme also differs than conventional single-use projects. This perception is

    geographically. largely reasonable. A proper understanding of the role,

    According to Bell [2], mixed-use development is practice and concern of individual parties is essential

    gaining importance due to three primary reasons: towards successful realization of initially expected

    benefits. For engineering and construction professionals, ?More public policies are pointing developers in that the increasing demand for integrated efforts among direction: developers can gain an economic edge at the project team members and frequent emphasis on life city level by taking advantage of existing cycle planning both add to the necessity to understand the infrastructures and increasing densities. differences between mixed-use and singleuse ?There is a market demand for it: there are more and more developments.

    indications that people feel a sense of vibrancy and Rightfully, a complete discussion on this topic should

    community when they live in a mixed-use development. be structured along five phases: project initiation;

    feasibility studies and financing; planning and design; ?People living in mixed-use developments have a definite construction; marketing and operational management. transportation advantage: it saves on time if one work Due to limitation of space, only the first three phases are near where he/she lives and has nearby access to addressed in more detail. Theoretical aspects are amenities facilities. associated or compared with the actual happenings in two When contemporary planners and designers speak of selected cases the Kuala Lumpur City Centre in mixeduse, they often do not advocate a jumble of uses. Malaysia and the Suntec City in Singapore. Practical

    information of the two cases was collected through Southeast Asia, Singapore's largest shopping and interviews with personnel who were once involved in entertainment centre, a landmark fountain and other these projects, in conjunction with secondary data amenities. Designed to be a “city within city”, Suntec obtained from Internet websites and news articles. City's overall objective was to integrate various

    development components into a logical city centre that 2. BACKGROUND OF CASE STUDIES also connects and relates to adjacent developments and to

    the larger Central Business District (CBD) of Singapore. 2.1 Kuala Lumpur City Centre (KLCC), Malaysia The development sit is connected by both internal roads KLCC is a master-planned, mixed-use development and perimeter highways. Pedestrians can reach the site occupying 40.5 hectares of prime land in the middle of from the nearby subwaystation, link bridges, and Malaysia’s capital city. The major landmark of the project underpasses to adjoiningdevelopments. Inspired by the PETRONAS Twin Towers, serves as the primary traditional Eastern symbolism,the design blends elements anchor of the development. The success of KLCC was from the ancient Chinese art ofplacement (otherwise seen from the outset to be of national interest. The owner known as “feng shui”). and developer KLCC Holdings Berhad (whose largest

    shareholder is PETRONAS, the national petroleum 2.3 Comments and Observations

    company), was responsible for the development and is The KLCC development is clearly impressive and currently still coordinating new projects undertaken proved to be a successful mixed-use development project. directly or in joint venture with others. The total area of The effort made to achieve the end result of the initial KLCC will eventually be some 1.67 million m2. The phase of the development was massive. The project development projects completed as of mid-2005 include served a purpose greater than a typical mixed-use, high-the PETRONAS Twin Towers, the Kuala Lumpur rise development perhaps with an element of national Convention Centre, Suria KLCC (a shopping centre), two ambition to make a mark on the world map. One could office towers, a 643-room five-star hotel, a district argue that whatever the additional cost born by the cooling centre and a 20-hectare public park providing an developer beyond what perhaps would not be spent by a ideal recreational venue. “traditional” private developer – has to be chalked up to

    The total cost of developing the twin towers and its attain the greater good of the city and the country. Most ssociated infrastructure alone was Ringgit Malaysia (RM) of all, aside from the high standards it has established for 2.8 billion. This excludes the cost of Suria KLCC and the the real estate development community in the city along other buildings involved. The financing methods used with the premium values it has been able to command, were KLCC has also been a boon to nearby residential and primarily traditional ones. Initial site clearance and the commercial properties. Put differently, even if the project start itself may not generate comparable returns compared to of infrastructure development were funded by “safer” conventional projects, it does generate some

    shareholders’ equity. Project finance and working capital spillover benefits for adjacent properties due to its were drawn from financial institutions in the form of landmark characteristics. Thus, from the viewpoint of the loans. The twin towers were refinanced after completion. government and the public as a whole, some of the The new facility consisted of a mix of mortgage-backed benefits recouped are indirect and cannot be quantified on end-finance along with short, medium, and long-term paper.

    bonds secured against PETRONAS’s long-term lease In the case of Suntec City, the key to the success commitment. proved

    KLCC is managed by a wholly owned subsidiary of the to be teamwork. Many different entities from several developer. Property management is divided into several countries were involved with the project, including divisions to attend to various needs and uses. Numerous investors, architects, general contractors, owners, tenants, third-party contractors provide maintenance and managers, design and project consultants, and management services. The largest of these is the operator government agencies. In order to achieve a smooth of the 30,000-ton chilled water plant (the District Cooling completion of the project, extensive legal agreements Centre), which combines natural gas-driven cogeneration were required. As proven, a unique and high-quality equipment with various forms of steam turbine-driven project increases value, and value supports price. chillers and electric chillers. A building control system Nowadays, Suntec City has become one of the most provides central management and monitoring for air valuable office buildings in Singapore.

    conditioning control, lighting control, electrical and

    chilled 3. PROJECT INITIATION

    water status monitoring, and energy management services.

    Success in mixed-use development, more so than in

    most other types of development, requires a capable and 2.2 Suntec City, Singapore

    A mixed-use project on an 11.7-hectare site, this mega diverse development team. According to research development project comprises five blocks of office space, conducted by the Royal Institute of Chartered Surveyors (including one 18-storey and four 45-storey office towers), [3], it is important for the development team not just to the largest international exhibition and convention centre include a right mix of development skills, but also to in engage all of that experience in the project early in the

    design phase so that the result is a strong mix of variety, to determine what specific uses should be included vitality and visual interests. Depending on the scope and through a thorough market analysis for each contemplated nature of the project, an architectural firm or a planning use.

    firm forms the core of the design team, with specialists

    4. FEASIBILITY STUDIES AND FINANCING added to the group as appropriate. Specialists are

    important even for a single-use project, but in a mixed-Once a site has been identified, concerns typically use development they are more critical, because it is very begin to center on assessing multiple market potentials. difficult to find one firm capable of handling the detailed The process involves the use of statistical analysis and design of all the various elements of the project. field research to determine supply and demand within Especially in projects with numerous freestanding specific market areas. The market studies must also components, it is common to have one planner/designer consider the market synergy resulting from a combination to develop a general concept and land use plan and other of complementary uses in a single development. After the separate architects to design individual buildings. It is market analysis is complete, the developer would decide also necessary to include market analysts, contractors, what portion of an unfulfilled or totally new market the financial analysts, financial institutions, and property proposed development could actually capture. The managers as early as possible in the team. developer can also determine where the cornerstone of In the case of the KLCC project, an international the project is derived from. Next, the timing, phasing, and architectural competition was held and eight of the land allocation are considered under the development world’s implementation program and strategies [4]. leading architects presented their design concepts. Cesar Although the PETRONAS Twin Towers often steal the Pelli & Associates Architects was selected to design the limelight in terms of publicity, Suria KLCC, a highly project’s first phase, including the PETRONAS successful shopping center, was purposely planned and headquarters, its adjacent tower and a shopping center constructed at the same time as the twin towers. This that was attached to the office towers. In this project, the facility features 338 department stores, shops, restaurants, developer had also set up an entire local architecture and entertainment outlets within its net leasable area. In practice to advance the work from a local standpoint as this case, Suria KLCC had been clearly identified by the well as to facilitate transfer of knowledge and technology project developer as the cornerstone of the project as it during the development process. helps to draw significant numbers of people to the As for the Suntec City project, the challenge of development. translating the vision for Suntec City into reality was However, there are other projects that might not have delegated to a team of international consultants, who clear cornerstone uses but instead a careful balance of worked closely with a group of Singapore managers. The uses. collaboration of renowned American architects I.M. Pei In such cases, the problem becomes more difficult & Partners and Tsao & McKown of New York on the because the developer must address numerous conflicting master plan enabled the team to win the Urban objectives. For example, there is no clear single Redevelopment Authority (URA) tender. Tsao & cornerstone in the Suntec City project. As a one-stop McKown, as the design architect, worked closely with the center in a prime business location, the development local architects DP Architects, on working drawings provides services ranging from postal, banking, and authority approvals. telecommunications, travel, medical, shopping, dining, These two projects show that the mix of development and entertainment. The balance of these uses was team members plays an important part during the initial designed as an amenity for the built-in customer base in stage of a mixed-use project development. They also the Suntec City’s office tower, which constitute of a total demonstrate that the local architects still play a critical working population of 30,000 people. role even when international renowned firms are engaged. Because mixed-use development usually takes a long The former would assist in getting local approvals and period of time for pre-development planning and infusing construction, the possibility that the overall economic local elements and flavors into the design concept. More climate would change is greatly increased. In addition, than just providing state-of-the-art design concepts, the mixed-use development is involved in different land use latter would bring prestige and marketing value to the markets with its own cycles apart from the overall project. economy. Hence, it is wiser for the developers to The location of any development site fundamentally minimize their risk by implementing project phasing. In affects the nature and success of the development. Most the Suntec City project, ground breaking took place in development approaches can be divided initially into two 1989 and the project was launched in three phases over categories: the search for a use for a site, or the search for the period from 1994 to 1997. Similarly, the KLCC a site for a use. Mixed-use development, however, is not project is meant to be constructed in phases over many as simple, and both approaches can often play a role years. The master plan shows a total of 22 separately within the same project. A development entity, for titled development parcels surrounding the park. At least example, might be predisposed to developing a mixed-use seven parcels either have been developed or are under project, identifying a suitable site for such a development, construction as of 2005. but be uncertain about the exact mix of uses. Thus, the

    initial assessment must be followed by a second analysis

    Perhaps the most difficult element of implementing a A preferred plan and design would need to react to successful mixed-use project is securing adequate and both

    appropriate financing. Different uses demand different internal and external factors. Compared to most sets of development and management skills, pose unique conventional single-use projects, mixed-use risks, and require distinct investment parameters all of developments require considerably more complex designs, which add layers of complexity to underwriting and not only good architecture but also urban planning investing. Moreover, most mixed-use projects, considerations. Physical outlook, image, the particularly those in expensive locations, require public interrelationship of elements, and the project’s

    subsidies, which have their own investment criteria. relationship to the surrounding environment are crucial to Consequently, mixed-use developers must assemble a the economic success of mixeduse development. In mix of equity, conventional debt, and subsidy funding addition, the approach adopted by the development team that is consistent with the mission and performance [5]. may be influenced by other factors. These include: (1) An international joint venture had been formed in size of the scheme; (2) location and setting; (3) Suntec City the project was partly funded by a architectural “fashion”; (4) the requirements and attitudes

    consortium whose 11 shareholders are among Asia’s of investors, occupiers and their advisers; (5) other most successful entrepreneurs. Joint venturing with planning requirements and public opinion. While factors financial institutions is also an ideal method of arranging (1), (2) and (3) are generally within a developer’s control financing for project development. In some cases, a joint in many conventional single-use projects, this may not be venture is created between developers specializing in the case for mixed-use, especially when unique public different project components, for example, between a policies are dictating the development initiatives. hotel operator and an office or retail developer. Although the planning and design of the KLCC project At certain times during the business cycle, it may be was a success one, it was not entirely trouble-free either. advantageous to create a joint venture between the The architect’s brief for the twin towers involved

    developer and major tenant in the mixed-use development requirements to reflect a Malaysian identity, but at that that wants to have the building associated as part of its time there were no relevant projects in the country that corporate identity. This is evident in the KLCC project as could easily be translated into a vernacular high-rise KLCC Holdings formed a joint venture partnership in design. It was after researching the Islamic heritage that which PETRONAS would become a major shareholder the architect proposed the geometric pattern composed of and an anchor tenant of the development. Another two rotated and superimposed squares with small, approach to joint venture involves bringing the developer rounded infills. Like the exterior design, the entrance together with the landowner. The developer avoids design of the towers was also inspired by the country’s

    having to acquire the land, and the equity in the land cultural heritage, incorporating contemporary Malaysian assists in financing the project. motifs adapted from traditional handicrafts such as timber Some developers prefer to retain all of the equity in carvings. Similarly, the planning and design of Suntec their project. Situations arise, however, in which it is City were in fact governed by special intentions. better to have 50% of a completed project than 100% of Buildings and features are arranged in a configuration

    that was inspired by traditional Eastern symbolism and one that cannot be built. The developer may sell part of

    his equity in several ways: a land sale-leaseback, outright ancient Chinese art of placement. In its entirety, Suntec sale of a portion of the project, or formation of an equity City resembles a left “hand” – the convention centre

    syndication or Real Estate Investment Trust (REIT). In represents the “wrist”, the 18-storey office block is the the case of the KLCC project, each separate development “thumb”, and the four 45 storey office towers depict the within KLCC is responsible for discerning and meeting “fingers”. The “palm” is cradling a “ring” that is

    its own financing needs. To date, construction and end represented by a fountain. With its cascading water finance facilities have been predominantly by way of flowing inward, it is said to represent the retention of equity finance and traditional bank borrowings. KLCC’s wealth and bring prosperity to tenants and visitors alike. agreement with each respective development partner All these features, which may seem trivial or superstitious mandates a maximum 60:40 debt-toequity ratio in which to some, prove to be symbolic in the eyes of the owners. any cost overrun is paid for through advances from

    6. COMPARISON BETWEEN SINGLE-USE shareholders. As for the case of Suntec City, the total

    development cost of S$2.3 billion was funded with an AND MIXED-USE DEVELOPMENTS

    undisclosed shareholder equity contribution and

    Some of the key differences between mixed-use and approximately S$1.5 billion in debt, with the balance

    single-use development processes are summarized in being

    Table 1, which also include issues from the two other funded from the sale of office space (both Towers One

    phases that are not discussed here in detail due to the and

    limitation of space. It is evident that some of these Two were sold out prior to construction completion). The

    differences could affect the functioning of the role of debt had been fully paid off from sales in 1998.

    many parties, including design and engineering

    professionals. For example, while a 5. PLANNING AND DESIGN

    Design- Build contractor may position itself as the single

    party responsible for both design and construction in a

    single-use project, the contractual arrangement of a mixed Consequently, the aforesaid contractor may need to work use project could be more segmented, especially when closely with other consultants/contractors and would have there are separate parcels within the same project. less flexibility in controlling its own scope of the work.

    Table 1. Comparison of Main Features between Mixed-use and Single-use Projects

Phases of

    Development Mixed-Use Development Single-Use Development

    Process

    ?Experienced and diverse project development ?Single experienced architect/project manager

    team acting as project team leader

    ?Involvement of public sector agencies crucial ? Relatively minor/routine involvement of public

     Project ?Both financial and non-financial development sector agencies

    Initiation objectives must be well defined ? Common and obvious development objectives

    ?Analyzing multiple markets / development ? Analyzing only a specific market potential;

    potential and evaluating the overall market there is little concern on synergy since it is

    synergy meant for single-use

    ? Necessity to define alternative development ? Independent development program and

    programs and strategies strategy

    Feasibility ? Complex feasibility analysis to define and ? Simple pro-forma analysis and economic

    Studies optimize the development programs modeling

    and Financing ? Necessity to securing large, multi-layer ? Single source of financing is possible and

    financial commitment and structuring financial financial arrangement is straightforward

    arrangements between project owner and bank

    ? Complex planning and design issues ? Conventional architectural and structural involving design process urban considerations Planning and ? Urban considerations play a more limited role ? Creation of interrelationships among design Design in overall project planning and design elements and also between project and the ? Involvement of specialists is less profound due surrounding environment to simplicity of design ? Significant involvement of specialists

    ? Multiple contractors working in different ? Usually single contractor who has sole control

    Construction parcels/phases; interfacing is critical of planning and coordination of site works

    ? Interaction with more specialists/designers ? Fewer number of architects/design engineers

    ? More varied and innovative approaches on ? Marketing approaches targeting specific use

    marketing strategies for numerous uses only Marketing and ? Long term promotion is necessary to continue ? More effort on promotion before project Operational building interests among general public completion and relatively less thereafter Management ? Centralized control management systems for ? Single responsibility for property management

    multiple uses agency

    7. PITFALL OF MIXED-USE and amenities, make different components dependent on

    one another for completion. In the long run, it usually is DEVELOPMENTS AND

    better to create distinct systems, wherever possible, to RECOMMENDATIONS TO OVERCOME avoid reliance on another owner. Nevertheless, even with

    distinct systems, it is desirable to have a single party that 7.1 Ownership Tangles

    handles one-stop development and management for all Mixed-use development often involves multiple owners

    phases of the development. This would reduce whose priorities regarding design, governance, and

    coordination time and multiple ownership complexities changes in use or ownership can be in conflict both

    associated with having too many parties executing the during development and after the project is complete.

    master plan [6]. Reactive resolutions are time consuming, costly, and

    potentially fatal to the project. Although a mixed-use 7.2 Land Assembly project could have only one project developer, it would To create a credible and viable mixed-use development still need to be structured for many different property site, land assembly can be a very formidable task. Bell [7] owners. It is necessary to organize project and legal highlighted that site selection is the foremost problem of documentations for future changes based on each use. mixed-use development because large parcels of land Extra efforts are required upfront, but this is ultimately must be assembled. While successful mixed-use projects the most cost-effective strategy. Shared physical require the coordination of many actors, local boundaries, as well as various common building systems governments occupy the best position to create and

    sustain the larger vision and to assist with critical aspects partner in the process, as they play an active role in of the development process such as land assembly, developing local urbanization plans, providing necessary entitlement, and investment in key infrastructure facilities infrastructure, and even altering the public’s perception of

    and other amenities. Stronger local authority action in market conditions in the area. Financing mixed-use assembling sites, possibly using compulsory purchase projects is more complicated. This is exacerbated by the powers, would facilitate mixed-use development schemes. fact that traditional means of financing (bank loans) could When a public-private agreement exists between the come at a higher cost due to the perception of higher risks. developer(s), the builder(s), and the local government, the As such, the development team needs to structure the parties would be more willing to make their commitments project creatively to provide investment opportunities for to ensure success of the project. a range of investors. The responsibility is on the team to

    demonstrate that the project is creating value in the 7.3 Planning Application and Procedures community beyond its short term market performance and The lengthy planning application and decision-making will prove its worth in the market place over time. process in mixed-use development often discourages Some common pitfalls and drawbacks that create developers from considering such schemes. The key to barriers to the realization of mixed-use development have any mixed-use development is creating consensus among also been identified. However, the events in the two case local residents, neighboring property owners, government studies suggest that these barriers can be overcome with

    agencies and the developer. In order to make things go as good determination, proper planning and design, co-smoothly as possible, it is recommended to lay the operation, flexibility, imagination and good timing. It is political groundwork through community outreach efforts. important to realize that mixed-use is more of a In addition, gaining the support of local government and development culture, rather than simply being another creating clear lines of communication with government technical planning aspect. Ultimately, it is the mixed-use agencies can substantially shorten the entitlement process. outcome (a richly textured environment comprising a This point is clearly demonstrated in the KLCC project. mixture of life activities) rather than the mixed-use output In view of the massive and fast-track development (a discrete development incorporating a mix of uses) that program that the project developer KLCC Holdings had underpins the success of a mixed-use development project. undertaken, the Kuala Lumpur City Government decided

    to assist the project by providing dedicated building plan REFERENCES

    inspection staff and facilities to expedite approvals.

    [1] Flynn, L., “Developing a Winning Combination”, Without such close interactions between the design team

    Building Design and Construction, Vol. 44(3), pp. 26-32, and the relevant statutory bodies, initial phases of the

    2003. project almost certainly would not have been completed

    [2] Bell, J., “A Mixed-use Renaissance”, Mortgage as quickly as they were.

    Banking, Vol. 5(8), pp. 66, 2004.

    7.4 Institutional Investors’ Criteria [3] Royal Institute of Chartered Surveyors, Mixed Use

    Institutional investors are sometimes reluctant to invest Development: Concept and Realities, RICS Research,

    in mixed-use schemes because they are perceived to offer 1996.

    poor long-term investment prospects, and are typically [4] Schwanke, D., Mixed-Use Development Handbook,

    not large enough to generate the scale of profit sought by Urban Land Institute, Washington, D.C., 1987. this type of investors. However, some developers have [5] Royal Institute of Chartered Surveyors, Mixed Use

    successfully attracted investors by structuring multiple Development: Issues and Practice, RICS Research, 1998.

    investment opportunities into their projects for investors [6] Culp, L., “Mixed Results for Mixed-Use”, National

    with different levels of investment horizons and return Real Estate Investor, Vol. 45(8), pp. 24, 2003.

    expectations. A project, for example, may offer modest [7] Bell, J., “Mixed-use Property Review E Pluribus

    returns to investor in the first few years, when the project Unum: The Synergies of Mixed Use”, Midwest Real

    faces its greatest uncertainty, and increasing returns to Estate News, April, pp. 35-57, 2000.

    middle and long-term investors as the property

    appreciates in value.

    8. CONCLUSIONS

    Mixed-use development is complicated, costly and

    risky.

    The continued emergence of mixed-use projects as a

    powerful community development tool will ultimately

    require all parties involved to continue learning about and

    refining their approach to these projects. Successful

    implementation of a mixed-use project requires a

    carefully assembled development team that possesses

    strong management, development and design experience.

    It is most useful to involve the local government as a

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