If you were planning to cook a dinner for you and a friend, would you buy enough food to serve eight solely because the table seats eight? Would you buy six tickets to a movie for you and your date simply because your car seats six? Of course not. You would be wasting money buying excess capacity that you’re not planning to use.

In Husk v. City of Bend (October 2022), the Oregon Land Use Board of Appeals (LUBA) opined that the city of Bend had erred in approving a tentative plan for a 26-lot single-family subdivision (and certain related waivers) by failing to consider that the site could theoretically be developed for 104 residential units under the 2019 “middle housing statute” (House Bill 2001).

In rendering its opinion, LUBA wrote that this maximum theoretical capacity consideration is “required” by the middle housing statute. Given the potentially massive impact this decision by LUBA could have on horizontal development requirements and cities’ land use application review, let’s take a closer look at the ruling and consider some questions left in its wake.

But first consider the facts, which are fairly unremarkable. The developer sought and received approval from the city of Bend for a tentative 26-lot subdivision plan and a waiver of certain public improvements standards, allowing construction of only partial street improvements. The approval was appealed, and the dispute made its way to LUBA. The parties contesting the approval (the “petitioners”) asserted that the Bend hearings officer who granted the approval made four errors in the process.

LUBA summarized the main thrust of the second asserted error (the subject of this article) as follows: Petitioners argue “that, because the middle housing statute requires the city to allow up to four dwellings on each newly created lot, (transportation review), water and sewer capacity review, and (fire code) compliance review are required to take into account the potential number of dwellings that could be developed on a lot within the new subdivision.”

Essentially, petitioners argued that the hearings officer’s conclusion that a maximum of 26 dwellings would be developed on the lots (and approving the plan and waivers based on that conclusion) was erroneous and not supported by substantial record evidence because 104 units are theoretically allowed by the middle housing statute. Of course, this ignored that the actual plans approved by the city were designed and intended for development of only 26 units.

LUBA agreed with the petitioners’ general argument, but reframed it in the process. While the petitioners’ arguments (as summarized by LUBA) focused on how the Bend development code required such considerations because the middle housing statute allows denser development of right, the LUBA opinion stated instead that the middle housing statute requires that the city consider maximum “of-right” development.

LUBA remanded the case to Bend for reconsideration of the application, but while that process and any appeals of LUBA’s ruling run their course, two questions remain:

1. On what basis is LUBA asserting that the middle housing statute (rather than Bend’s development code) “requires” Bend to consider the maximum potential development of the lots? The LUBA opinion fails to cite a specific middle housing statute provision that articulates that requirement; the opinion only cites what the statute allows. Additionally, a read of the plain language of the middle housing statute reveals no maximum development requirement.
2. Is the logic applied by LUBA here generally applicable? Will any proposed development that falls short of the maximum legally permitted density be at risk of legal challenge, with the potential to be forced to develop infrastructure to support maximum legally permitted density, regardless of the plans?

The LUBA ruling as written does not clearly limit its logic only to the middle housing statute and/or residential development. As mentioned above, at its most basic level, the logic of this ruling rests on requiring the city to consider potential uses, rather than the uses proposed in the application. The middle housing statute was merely the source of such “potential” in this case; any other statute or code provision could be the source of such potential in other situations.

The cost implications are obvious and concerning for builders across all areas of commercial and residential real estate development. In the Husk case, development of infrastructure to support 104 units at a 26-home development will almost certainly upend the prospective developer’s budget and project profitability. Accounting for excess traffic and utility impacts (beyond what is planned) is no less costly for other types of commercial development.

Finally, something equally concerning but perhaps less obvious is the possibility that angry neighbors and other anti-development forces may attempt to weaponize the logic in this case to stop other “less than maximum density” developments in the future. Ironically, this may hinder future development and density, which is precisely the opposite of what the middle housing statute was intended to stimulate.

Jeffrey Kapp is a Jordan Ramis shareholder. He advises clients on matters that span the entire spectrum of complex commercial real estate and finance transactions. Contact him at 503-598-5537 or jeffrey.kapp@jordanramis.com.

Jordan Ramis land use planner Chris Damgen contributed to this article.

This article is intended to provide readers with general information and not legal advice. Consult professional counsel for help regarding specific situations.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

The post OP-ED: LUBA hints at possible ‘maximum capacity’ requirements appeared first on Daily Journal of Commerce.

The impact of the COVID-19 pandemic upon the food and beverage industry has been well-documented and is readily apparent. According to the National Restaurant Association, total restaurant sales for 2020 came in approximately $240 billion below projections and, as of Dec. 1, 2020, more than 110,000 eating and drinking establishments had closed either temporarily or for good.

In addition to being important economic drivers, restaurants also have become an integral part of American social life. As such, it comes as no surprise that the Small Business Administration recently rolled out a multibillion-dollar “Restaurant Revitalization Fund” to help the sector get back on its feet.

Restaurant tenants and landlords have now largely adjusted to the challenges presented by the pandemic, making on-the-fly adjustments to existing lease agreements. As we race toward mass vaccination and (hopefully) the economy reopening, we might ask: What, if any, lingering impact will the pandemic have on the restaurant industry and the real estate leases in particular? What demands will changing business models and tenant needs place upon owners and space designers post-pandemic?

Here’s a look at five early trends in the emerging post-COVID marketplace, and some thoughts on their legal and business implications:

1. Drive-thrus

According to Matt Sichel, a senior director at NAI Elliott in Portland, tenants with drive-thrus generally have fared well, and in the Portland metropolitan market there is strong demand for leases of space with such capabilities. This is not surprising – long drive-thru lines are now a common sight. Those long lines do, however, present a challenge for landlords trying to take advantage of this trend. Even restaurant chains with expertise in handling heavy drive-thru volume have, at times, faced issues – blocked drive lanes, blocked parking spots, and lines spilling into surrounding streets. In a multi-tenant shopping center, these traffic flow issues can impede access to, and parking for, the surrounding tenants. The issue may need to be addressed, not just from a design angle, but also from a legal angle by building rules and obligations into leases and shopping center master declarations to require drive-thru restaurants to mitigate the impact of their lines, and granting landlords certain rights to address recurring issues. A robust mitigation plan will also provide assurances to prospective tenants of surrounding spaces that may be wary of leasing space near drive-thru tenants.

2. Curbside pickup, third-party delivery

Many restaurant tenants added curbside and third-party delivery service capabilities during the pandemic, and they certainly are not going to remove these additional “to go” service options from their arsenal going forward. Proximity of parking spaces to their premises’ doors is of increased importance to facilitate these services. From a design perspective, ensuring that retail projects have sufficient dedicated parking for such curbside/delivery service traffic will minimize congestion from restaurant staff running orders to cars. From a contractual standpoint, landlords may end up facing more pressure than before to grant tenant-specific dedicated parking to tenants that have not historically received such rights.

3. Outdoor seating

Despite the new emphasis on takeout as a source of revenue, many restaurant formats still depend upon on-site, in-person dining experiences. According to Sichel at NAI Elliott, in addition to an increase in demand for outdoor seating areas for tenant use, tented areas are probably going to be a permanent feature at retail establishments for the foreseeable future. The grant of exclusive, and nonexclusive, rights to use outdoor areas at shopping centers raise certain practical issues that should be addressed in new leases. If a landlord wishes to provide a single mass outdoor seating area, available to all restaurant tenants for use by their customers, then the restaurant tenants’ leases may need to incorporate concepts usually found in mall “food court” leases. Increased ground rubbish, more frequent common area trash bin emptying near the eating area, sufficient supply of tables and chairs, and daily cleaning and securing (at night) of such tables and chairs are all responsibilities that need allocating. The restaurant tenants likely should bear either the main cost, or the actual task, of handling these issues. As for tented eating areas used by individual tenants – these are often placed in parking spaces, which can render certain challenging situations even more difficult (not to mention any questions about zoning code requirements that may arise).

4. Changes in space needs

It has been written that, on average, around 60 percent of a restaurant’s leased area is typically devoted to dining space. That rule of thumb percentage may no longer hold, given the pressure from demand for outdoor seating options and the increased emphasis on takeout discussed above. Additionally, the line between “indoor” and “outdoor” is being further blurred, as tenants are increasingly including amenities like roll-up doors in their proposed build-outs to increase outdoor eating capacity. Lease restrictions on permitted “outdoor” activities in project common areas may increasingly need to affect activities inside tenants’ spaces too, as the line between inside and outside of leased space begins to blur.

5. Dealing with future shutdowns

For many small restaurant tenants, the obligation to pay rent and costs is backstopped by a personal guaranty from the owners; a failed store means not only lost investment, but also the possibility of a personal lawsuit to recover the landlord’s lost rent. As a result, more tenants are requesting, and receiving, rent abatement provisions in their leases to address future shutdowns affecting on-site dining. Currently, these abatements are structured as proportionate rent reductions based upon occupancy reductions. If trends shift toward more takeout-based revenue, perhaps other solutions will arise, such as temporary “percentage rent” structures. Regardless, tenants are now less willing to shoulder shutdown risks alone.

Jeffrey Kapp is a Jordan Ramis PC shareholder. He has special expertise handling complex commercial real estate and finance transactions. Contact him at 503-598-7070 or jeffrey.kapp@jordanramis.com. This column is intended to provide readers with general information and not legal advice. Consult professional counsel for help regarding specific situations.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

The post OP-ED: Considerations for restaurant leasing in a post-COVID world appeared first on Daily Journal of Commerce.