Mixed-use development is seeing a spike across the country as millennials and seniors alike look to live, work, and relax in walkable communities and municipalities and developers work to meet the demand.
According to NAIOP Development Magazine, mixed-use communities are attracting “empty nesters who want to rid themselves of the burdens of home maintenance and lawn care and spend less time running errands in cars — as well as millennials who are looking for authenticity, neighborhood identity and ‘buzz,’ and who are avoiding or delaying car ownership.”
The creation of density and diversity by combining office, retail, and residential into a single development is rapidly becoming the norm, but along with this trend come new challenges with financing.
Making the Moving Pieces Fit
Mixed-use developers have typically faced an uphill battle when it comes to assembling capital for multi-use projects, often being forced to piece together funding from multiple sources. A major issue with mixed-use financing is making sure all potential investors feel comfortable given that they are investing in multiple asset types as residential, retail, and office coexist in one project.
Residential mortgage, commercial real estate, new market, and small business financing could all potentially play a role in the financial structure of a mixed-use, urban infill project. As with any project, the first step to securing funding is to show limited risk and high potential return. This process is more difficult for mixed-use projects as you need to anticipate market trends and demand for different asset types.
Development teams must do standalone underwriting for each asset type that will be included in the project, which means separate market and pro-forma analyses, stress testing, and third party references, potentially even necessitating legal advice from lawyers with different specializations. These costs can significantly add up while simultaneously giving pause to potential investors.
Importance of Local Cooperation
One of the largest challenges to financing mixed-use developments is selling the community on the project. This includes residents, other business owners, and most importantly, the local government. In traditional, single use projects there are standard processes around complying with zoning laws or even petitioning to change a parcel of land from industrial to residential or from residential to retail, for example.
But, planning mixed-use, multi-zone districts is more complicated than planning conventional development and can lead to a slower, more complex approval process.
However, if you can drum up local interest and support, “public and quasi-public entities may be willing to pay for infrastructure” and developers can reap the benefits of government assistance in the form of tax increment financing (TIF) and support from business improvement districts (BIDs) that help to finance infrastructure (NAIOP Development Magazine).
In Cherry Creek North, for example, a multi-block mixed-use district in Denver, developers and local businesses created a business improvement, which has pioneered investment in infrastructure, public spaces, and landscaping. And, the neighborhood is booming as a result, seeing more volume than any other Denver district or mall.
Where Crowdfunding Can Help
Investment crowdfunding through online real estate marketplaces can provide an additional capital source to fill the funding gaps left by big banks and private partners.
Through the use of online origination, automated filtering, and sophisticated underwriting, crowdfunding platforms are able to provide financing for a variety of different asset types, ideal for the funding of complicated mixed-use projects.
Mixed-use developments create density, promote walkability, and push cities into a new frontier of planning and development. While the challenges are real and the financing process can be tedious, innovative investors, new funding sources, and growing demand for mixed-use assets are helping the industry slowly gain steam and build traction.
Image Source: Skys the limit2, Flickr