Operational Challenges in Mixed

Operational Challenges in Mixed-Use Projects
Session Sponsor
Ross Painting has been creating happy customers throughout the San Francisco Bay Area since 1986.
Family owned and operated, we are large enough to take on large projects, yet small enough to provide
outstanding personal service. We take great pride in providing quality painting, managing our projects and
impressing our clients!
www.rosspainting.com
© 2017 CACM Law Seminar
Operational Challenges in Mixed-Use Projects
Presented by
Northern California: Tom Connell, CCAM-PM.HR & Alex Noland, Esq.
Introduction
Mixed-use projects are appealing to the marketplace. They allow residents to walk from their unit and go
shopping, or to a bar or restaurant, without having to get in their car. These projects can have greater curb
appeal than a typical residential building, as they not only conserve valuable land resources by vertically
stacking residential and commercial/retail uses, but can also brighten communities and add urban vitality.
More and more developers are constructing mixed-use projects in both urban and suburban areas, bringing
activity and a stronger sense of neighborhood to the surrounding area.
That said, mixed-use projects present unique issues for community managers that are not encountered in
solely residential projects, such as permitted commercial uses and related nuisance factors relating to those
uses, segmented use and architectural provisions, differing maintenance responsibilities for the different
unit types, and complications related to assessments and cost centers. Effectively managing conflicting
residential and commercial interests in these projects can be a challenge, as the desire of residents to live
in peace competes with the desire of commercial occupants to operate a business for profit.
This seminar will assist managers working with mixed-use project associations to:
(1) understand how to address differing use restrictions, architectural control guidelines, maintenance
responsibilities, cost centers, and owner priorities and needs; (2) develop policies and procedures to
address differing residential and commercial rights and obligations; (3) identify whether permitted uses are
being conducted in commercial units and how to address potential use violations; and (4) handle complaints
between residential owners and commercial owners.
Differing Owner Rights and Obligations
It is important for managers of mixed-use projects to know from a legal standpoint how to address differing
use restrictions, architectural control guidelines, maintenance responsibilities, cost centers, and owner
priorities and needs. In addition, for an association subject to a reciprocal easement agreement or mutual
benefit agreement (or similar document), the manager needs to understand the rights and obligations of
both the association and the other party(ies) to the agreement and the mechanisms and procedures for
addressing disputes about agreement provisions and compliance.
Use Restrictions
An association’s CC&Rs will describe what commercial uses are permitted in commercial units, and what
types of commercial uses are not permitted. Often, there will be restrictions against such businesses as
bars/cocktail lounges; arcades, bowling alleys, billiard parlors, or theatres; any establishment related to
adult entertainment; any business related to illicit drugs; gambling houses; health services facilities offering
overnight care; lodging houses; funeral homes; and denominational places of worship. The permitted uses
will also depend on local zoning ordinances or planning codes and any special conditions that may be
imposed by the local planning department, as well as regulations of the local department of public health.
Commercial owners are generally allowed to divide their space without permission, and they may be
permitted to use sidewalks as outdoor seating space. In that case, however, voting rights and assessment
obligations of the owner of the commercial unit would general remain the same. Further, there is generally
a restriction contained in mixed-use CC&Rs relating to the permitted hours of operation for commercial
units, as well as specific provisions to help ensure that there is not excessive noise, light, smoke, or vibration
from the commercial unit that would disturb residential owners.
© 2017 CACM Law Seminar. All rights reserved.
1|Page
Operational Challenges in Mixed-Use Projects
Commercial units will often be excluded from certain general use restrictions in the CC&Rs (which thus
apply only to the residential units), as well as any operating rules adopted relating to those restrictions.
Such exemptions often include, among other things, the following items: (1) leasing restrictions, and
approval and notice requirements relating to leases and tenants; (2) use of power equipment/tools, vehicles,
storage of potentially hazardous materials; and (3) restrictions on floor coverings, sound transmission, and
certain “nuisance” activities.
Architectural Control Guidelines
With respect to architectural and design control, commercial owners/units are generally not subject to the
architectural control provisions of the CC&Rs, and do not require board/architectural committee approval
to make unit modifications. For example, commercial owners are often granted leeway to modify their
space, move/add/remove walls, and move or relocate utilities within the commercial unit without permission;
this means that a single commercial owner can subdivide the space into several commercial spaces with
different tenants. However, commercial owners will still generally be required to obtain approval for any
modifications affecting structural elements of the building or the use of the common area by residential
owners, and, while reasonable conditions may be placed upon such modifications, often such work cannot
be disapproved.
Maintenance Responsibilities
Maintenance obligations will be more complex in a mixed-use project than in a purely residential project,
as a commercial owner generally has a different maintenance role than that of the residential owners. For
example, commercial owners may be responsible for any commercial common-only areas, while the
association may be responsible for residential and shared common areas. There may also be additional
maintenance responsibilities not contemplated under the CC&Rs relating to the commercial unit that need
to be delegated.
Scheduling maintenance can be one of the biggest problems in a mixed-use building. This is because
different parts of the building are accessible and occupied during different times of the day. When
inspections, maintenance, or repairs need to be done on facilities serving both the residential and
commercial components, or facilities serving only one component but located within the other component,
trying to work out the logistics of access into units and limited common areas be a challenge. This will
require timely communication and effective coordination with the impacted owners.
Cost Centers and Expenses
The calculation of assessments is often more complex in mixed-use projects as there can be shared costs
for all owners as well as cost centers specific to residential owners only and specific to commercial units
only. The separation and unequal allocation of costs can be due to certain portions of the common area
being limited to use by only commercial or residential owners, differing maintenance/repair obligations and
ownership interests, and different insurance requirements. Common examples of cost centers include
residential area common expenses, commercial area common expenses, shared/general common
expenses, security/patrol and other personnel expenses, and parking/garage expenses. Sometimes the
costs are allocated equally among the units participating in the cost center, and other times the costs are
allocated on a variable basis (such as by unit square footage or number of assigned parking spaces).
In particular, utility costs can be an issue if there are shared utility services, such as water, electricity, or
refuse collection. If there are utility costs paid by the association that benefit both the residential and
commercial components, the CC&Rs should address how the cost of shared utilities are to be allocated
between residential and commercial owners in light of their level of consumption. If that allocation is not
clear in the CC&Rs or seems unreasonable, it would be prudent to advise the board to consult with the
association’s legal counsel to determine a resolution to the issue.
© 2017 CACM Law Seminar. All rights reserved.
2|Page
Operational Challenges in Mixed-Use Projects
The presence of commercial uses within the building may significantly increase the cost of insurance for
the association. This potential impact on insurance premiums should be recognized in the allocation of
insurance costs between the residential and commercial owners, and will hopefully be addressed in the
CC&Rs. In addition, having businesses on the property creates special risks not present in all-residential
condominium projects, such as injury to customers/patrons and loss of business revenue when a business
must close as a result of fire or other casualty or to accommodate common area repairs. To avoid a situation
where the association governing a mixed-use project is sued by a customer/patron of a commercial unit, or
by the commercial unit owner or tenant themselves, the commercial owner (and, as applicable his or her
tenants) should be required to obtain their own insurance for these risks, and to provide proof to the
association that the insurance is in place. Whether the association has the authority to require specific
insurance will be dependent on the provisions of its CC&Rs.
Owner Priorities and Needs
There are conflicting goals for the residential owners and the commercial owners. Commercial owners are
interested in operating for profit, and may not be cognizant of (or care about) some of the externalities of
their business operations. On the other hand, residential owners want to be able to enjoy their homes
without unreasonable disturbances; while governing documents for mixed-use projects generally state that
there may be additional nuisances arising from the mixed-use nature of the project, that does not allow
commercial owners to cause unreasonable nuisances. The association/board need to balance these
interests and ensure that governing documents are consistently and timely enforced.
In a mixed-use project, each residential owner and each commercial owner is entitled to the rightful
enjoyment of his or her unit – residential owners are entitled to a livable environment in the residential units,
and commercial owners are entitled to operate business profitably in the commercial units. The natural
tension between residential owners and commercial owners can be minimized when the critical issues
facing a mixed-use project are addressed by carefully written and detailed CC&Rs.
Reciprocal Easement Agreements and Mutual Benefit Agreements
Sometimes, instead of having a mixed-use project organized under a single association, there will be two
or more separate associations/developments with their own governing documents but with joint obligations
and rights under a recorded document such as a reciprocal easement agreement or a mutual benefit
agreement. In effect, this arrangement accomplishes many of the same things as a single combined
association, but there is a more distanced relationship – both legally and philosophically – between the
residential owners and the commercial/retail owners. When a commercial parcel is not a part of a residential
association contained within a mixed-use project, the association is much more limited in its enforcement
rights with respect to the commercial operation.
Development of Policies and Procedures
The development of policies and procedures to address differing residential and commercial rights and
obligations is important in a mixed-use project.
A commercial owner’s interests may not align with those of residential owners (or the association’s board
of directors). The association should establish clear guidelines and rules regarding potential problem areas
so that it is clear to the residential owners (and commercial owners) what their rights and obligations are.
In particular, parking rules for shared lots/garages and guest/customer parking, as well as rules detailing
the common area use rights of the residential owners and commercial owners and nuisance restrictions,
are important.
© 2017 CACM Law Seminar. All rights reserved.
3|Page
Operational Challenges in Mixed-Use Projects
Nuisance Factors
Problems can arise that involve trash, smells, traffic, and noise transferring from one use of the building (a
bustling restaurant or store) to another (residential units). There may be situations in which the association
needs to bring in an acoustical consultant to help address noise and vibration issues (i.e., mechanical
equipment on a roof above residential units that serves the commercial units can produce vibration that
enters the residential units below). And, in mixed-use buildings with restaurants, it will be crucial that the
commercial owners and occupants take sufficient measures to eliminate odors from both food and trash
and properly store and discard food items and waste.
Parking
Parking is another common issue that arises for mixed-use projects. Shared parking, whether on-grade or
in the building, is often separated in a mixed-use project, and an association has to be vigilant about policing
parking restrictions. Too often, people come into a store or restaurant in a commercial unit and want to park
as close as they can – sometimes parking in a resident’s space. This results in the resident coming home
from work or elsewhere to find a commercial customer/patron parked in his or her parking space, even
though near the space there is a sign that says “Residents Only”. In the converse, sometime residents will
want to park their vehicles in parking spaces designated for commercial units or allow their guests to do so
for sake of ease, which impacts the ability of the commercial unit operator to accommodate parking for his
or her customers/patrons.
CC&R Amendments and Rule Changes
The developer of a mixed-use project will often plan at the outset to sell the residential units and hold on to
the commercial units as investment property. That being the case, the developer’s attorney may (and likely
will) write the governing documents in a manner that includes minimal to no CC&R provisions regulating
the use of the commercial units and essentially giving the association no authority over commercial unit
operations. That becomes a problem with no easy solution when commercial unit operations are causing a
nuisance to the residential owners but the commercial units are being used in a manner that complies with
the CC&Rs, leading to potentially no technical violation to pursue and enforce.
Commercial owners also benefit from protections in the CC&Rs that protect their business interests. There
are generally provisions stating that sections of the CC&Rs or Bylaws related to the commercial units may
not be amended without the express written permission of the commercial owner, and this limitation can
make it difficult to pass amendments, which would impact a commercial owner in some way. This also
means that amending and restating the governing documents may be very difficult if not supported by the
commercial owner. The same situation often applies with respect to an association’s operating rules; rules
and regulations that purport to bind the commercial units generally require the consent of the commercial
owner to be bound by such rules and regulations.
Designated Board Seats
Many mixed-use bylaws grant the owners of the commercial unit either a designated seat on the
association’s board of directors, or an advisory or ex officio position on the board in which the commercial
board member is entitled to receive notices of and attend board meetings and participate in board
discussions but not vote. When addressing is type of board position it is critical to determine how election
or appointment of the commercial seat is intended to occur (particularly with respect to California’s statutory
secret ballot voting procedures for association elections), and who is qualified to serve on behalf of the
commercial owner. Additionally important is the determination of what sort of issues may arise if a
representative of the commercial owner is not seated in its designated position; for example, the bylaws or
CC&Rs could state that any action taken by the board without proper notice to the advisory or ex officio
commercial board member shall be of no force or effect.
© 2017 CACM Law Seminar. All rights reserved.
4|Page
Operational Challenges in Mixed-Use Projects
Verifying Commercial Use Compliance
A manager should know how to identify whether permitted uses are, in fact, being conducted in the
commercial units in a mixed-use development.
A set of CC&Rs for a mixed-use project will usually include a list of certain uses that are not permitted in
the commercial units, such as nightclubs, amusement arcades, adult bookstores, massage parlors, blood
banks, funeral homes, betting and gambling establishments, denominational places of worship, cannabis
dispensaries and smoke shops, etc. In addition, commercial uses must also comply with applicable zoning
ordinances and any special conditions imposed against the project, as well as local health codes. And, with
respect to restaurants and bars, there may be special provisions relating to the serving of food and/or
alcohol and the type of food or bar operation that is allowed under the CC&Rs.
Beyond permitted and prohibited commercial uses, another significant issue is whether the CC&Rs contain
restrictions on the days and hours of operation of the commercial units, particularly when it comes to
restaurant and bar operations, due to the noise and lights, among other things, that these operations can
cause in the evening hours. There may be different hours as to when the interior unit space can be open
for business and when a patio or sidewalk areas adjacent to the unit and used for service can be open for
business. Also, the CC&Rs may prescribe certain hours (and areas) for deliveries to commercial units.
Some CC&Rs contain provisions regulating the use of amplified or recorded music and television
transmissions in the interior and outdoor areas of a unit. Other items like signage, window displays, lighting,
awnings, horizontal sign extensions, and window appliques may be regulated under the CC&Rs. In the
restaurant and bar context, there may be CC&R provisions relating to venting and ventilation systems,
grease traps/interceptors, and chemicals and hazardous materials. Lastly, there may be minimal lease
restrictions (i.e., only requirements that leases for a commercial unit be in writing and state that the lease
is subject to the association’s governing documents), but there will often be no right of the association to
restrict the leasing of any commercial space.
An association’s manager and board need to be familiar with these use covenants, conditions, and
restrictions, as the association will be responsible to enforce them in the event of a violation. When a
question arises as to use compliance, verification may require a unit inspection, or research into local zoning
codes and/or possibly local health codes. For example, in San Francisco, owners of properties zoned for
industrial/agricultural use cannot grow medical marijuana unless the owner also has a licensed retail
business where the marijuana is sold (i.e., marijuana cannot be grown and sold wholesale). If an association
is going to take the position that the use of a commercial unit is not permitted, it will be prudent for the board
to seek the advice of the association’s legal counsel in advance to ensure that the board and association
are in a defensible position.
Handling Complaints Between Residential and Commercial Owners
As with other nuisance disputes, an association should ideally attempt to resolve commercial unit nuisance
issues informally at first or through other methods designated in its alternative dispute resolution policy, as
may be applicable, and proceed to court as an absolute last resort.
The nature of mixed-use projects creates tensions between residents and commercial occupants,
particularly between residential owners and restaurant and bar operators; even in a well-run restaurant or
bar, there are a lot of issues that can arise, such as odors, vermin, noise, etc. The primary challenge for
the board of directors, management personnel, and residential owners of a mixed-use project is that they
do not have much say or control over activities conducted in the commercial units. And, at the end of the
day, the residential owners purchased their units knowing (or at least being on record notice by way of the
CC&Rs) that there are commercial uses in the project that are reasonably expected to, or likely will, cause
certain nuisance factors to the residential units.
© 2017 CACM Law Seminar. All rights reserved.
5|Page
Operational Challenges in Mixed-Use Projects
Drag Queen Pillow Fighting and Jell-O Wrestling
The Plaza at Five Points Condominium Association in Sarasota, Florida sits atop the now defunct Ivory
Lounge nightclub. Starting in 2013, condominium residents started complaining that club noise was keeping
them up at night, and the owner of Ivory Lounge countered that he had done everything possible to keep
the sound from his club from bothering the residents. In January of 2014, the association pressured the
City of Sarasota to revoke Ivory Lounge's business permit, claiming the club was operating as an “adult
business” by staging drag queen pillow fighting and gelatin wrestling events.
The association’s complaint targeted the club's customers, saying that they were not “mature or educated”
and not keeping in line with the description of the business permitted under Ivory Lounge’s conditional use
permit. The owner of Ivory Lounge claimed that he felt some of the older residents in the building resented
his customers — most of them younger people — regardless of how loud the music was. The city found no
basis for the association’s claims, and did not pursue any action against the club.
The association’s residents also pressured the owner of the commercial space to break the club's lease,
and filed numerous unsubstantiated noise complaints with the Sarasota police. The attorney for the owner
of Ivory Lounge acknowledged that the association’s residents have a right to complain about whatever
they want, but that the association’s residents (including some board members) were carrying out a plan to
hurt the business operations of the club, made complaints that they knew were false, and were motivated
by dissatisfaction with the content of the club’s music and the nature of its clientele. The residents of this
association were unwilling to try and live as neighbors with Ivory Lounge, due in part to personal biases
and in part to not wanting to accept that their association was part of a mixed-use situation.
Hans' Bier Haus
In 2010, a Houston, Texas bar was in a much-publicized battle with residents of a condominium association.
The noise dispute arose between the residents of the association and the open-air beer garden located
below the residential units. Some residents living above Hans' Bier Haus went from making noise
complaints about the bar to actually spraying water and throwing ice blocks and raw meat down onto the
bar and its patrons, as well as making personal attacks and assaults against them. Eventually, the bar
owner won in court, and was found not to have created an unreasonable nuisance.
Dispute Resolution Options
The advice to give to a board of directors whose association is embroiled in anything that could lead to
something similar to the Ivory House or Hans’ Bier Haus situations should be to set a meeting and have
everyone try to talk like neighbors.
There are methods an association’s manager can pursue to try and help ease tensions between residential
and commercial owners, such as the following ideas:
1. Educate the residential owners about the allowed uses and operations in the commercial units,
and help the association stay within the authority that its governing documents provide.
Residents should be reminded that the association and its board of directors only have the
control granted to them in the governing documents, and that they were on notice of the
(potential) commercial uses and related issues when they purchased or moved into their units.
2. Work collaboratively with both the residential owners and the commercial owners to try and
resolve sensitive and “hot” issues. One option that may work is to have the board form a
committee comprised of representatives of both the residential and commercial units to evaluate
and provide guidance and advice to the board on those issues.
© 2017 CACM Law Seminar. All rights reserved.
6|Page
Operational Challenges in Mixed-Use Projects
3. Involve the commercial operators/occupants with the residents. A way in which to foster a
proactive working and living relationship between the residential and commercial owners is
through communication and social events. For example, a commercial owner running a
restaurant in his/her commercial unit could be encouraged by the board to attend and supply
some food for the association’s annual meeting and to send around a coupon to the residents at
other times during the year. Such actions by the commercial owner can create goodwill with the
residents that may help diminish complaints by residents about the restaurant being a little loud
on a given evening.
If all else fails, the association’s board should consider the nuisance provisions under the CC&Rs and
whether the association should request internal dispute resolution (a meet and confer) with the owner of
the commercial unit at issue or alternative dispute resolution (mediation). Of course, it would be prudent for
the board to consult with the association’s legal counsel before pursing either of these options to confirm
the rights and obligations of both the association and the commercial owner in the matter at hand.
Conclusion
Complicated situations will often arise at mixed-use projects with respect to nuisance factors and building
operations, and differing owner uses and interests introduce complexity into association governance. This
complexity can make the determination of the various rights and obligations of owners in the project more
difficult to ascertain. Dealing with and managing these competing interests requires a firm grasp of the
various provisions of the association’s governing documents and an understanding of the legal implications
of those provisions.
The best way to avoid issues related to the mixed-use nature of a project is to be aware of the rights and
obligations of the residential owners, the commercial owners, and the association itself, as well as
understanding how to prepare appropriate policies and procedures and how to address commercial owner
and residential owner violations. Being proactive in creating policies and procedures for a mixed-use project
can help to balance the potentially competing interests that arise as a result of having both residential and
commercial uses in a shared building. This will help prevent issues and disputes from arising and escalating
between the residential and commercial owners, which in turn will help promote harmony within the
community and reduce association legal costs.
© 2017 CACM Law Seminar. All rights reserved.
7|Page