PAD Sites In Massachusetts: Avoiding Subdivision Control In Shopping Center Development
 
April 1, 2000
 
Kenneth B. "Ken" Hoffman- Boston

The development of power centers in Massachusetts through PAD or out-parcel sales can be complicated by the application of the Massachusetts Subdivision Control Law. The Subdivision Control Law has as its purpose to regulate design and construction of ways in subdivisions and providing access to the several lots created by the subdivision until they become public ways. Recently, a national retailer negotiated to acquire land for a major power center south of Boston. The retailer was paying top dollar for the site and wished to establish PAD locations for stand-alone allied branded stores and have each individual retailer finance and construct its own building, subject to usual cross easements and common maintenance agreements. The national retailer would sell the PAD sites to the retailers, reimbursing itself for a portion of the substantial outlay of funds to acquire the land. The national retailer would retain enough land to build its store and other units in a strip center style.

As site design progressed and PAD locations were identified, it became apparent that the local municipality would require full subdivision review and approval over the development of the land under the Subdivision Control Law if the PAD sites were to be separately owned parcels. Moreover, zoning requirements, which are local but governed by a different state law, would also be applied to control building setbacks and other dimensional limitations. The timing of the project, however, was such that applying for subdivision approval and whatever zoning relief would be required was not feasible, especially given the very high price the developer was paying for the land. Moreover, the risk existed that approval would not be granted or that appeals could further delay the project. All of this would also delay reimbursement by the PAD owners who were relying upon their separate lenders to finance the acquisition of the PAD sites and construction of their own retail stores. Talks with the individual lenders indicated that lenders would balk about advancing funds for individual retail units if the PAD sites could not be separately owned and used to secure the loans. Without subdivision approval, it was not clear how to create separate ownership in the PAD locations and satisfy the lenders.

The initial strategy to solve the problem of not having separate ownership in the PAD sites was to ground lease each site, enabling each retail owner to become a ground lessee and thus be in the position to grant to their lenders a leasehold mortgage, although the mortgages would be subject to a variety of conditions regarding the sale of the leasehold interest in the event of a foreclosure. The proposed leasehold mortgages would further give the developer of the entire site rights to cure defaults and take over the obligations of the leasehold tenant should it fail to complete construction and pay back the construction loan. This strategy seemed to avoid the problem of subdivision control requirements. However, concerns were expressed that the municipality would view the leasehold arrangement as unlawfully circumventing the Subdivision Control Law, depriving the town of the right to control development on a very prominent tract of land. The town had a history of maximizing its involvement in development projects, and this project would not likely be immune from such involvement The leasehold strategy also left the developer of the entire site uncomfortable in its role as a de facto guarantor of the leasehold mortgage obligations. In order to protect against PAD sites not being developed or, even worse, partially developed, to the detriment of the image of the center as a whole, the developer anticipated having financial burdens and obligations that it had tried to avoid in the first instance. Thus, none of the parties were thrilled with the leasehold arrangement, even though the lease was structured to be extinguished in favor of a condominium ownership of the building to be constructed on the PAD site upon completion of construction. Separate ownership of each PAD through a condominium form was the ultimate goal, but that goal was similarly unobtainable without considerable risk to all parties during construction, especially since the developer would be delayed in getting reimbursed for the PAD site until the lender could be taken out by a permanent loan.

This dilemma led to a closer look at the Massachusetts condominium statute. It was clear that if the development of the center could be done through condominium ownership, the local municipality would not likely challenge the construction of multiple condominium units in separate buildings on unsubdivided land. The definition of a condominium in the statute seemed to expressly allow for a leasehold condominium and indeed, the statute was eventually amended to expressly include in its definition section the definition of a "leasehold condominium." The stumbling block, however, appeared to be the definition of a unit. The statute defined "unit" as "a part of the condominium including one or more rooms, with appurtenant areas such as balconies, terraces and storage lockers if any are stipulated in the Master Deed as being owned by the unit owner, occupying one or more floors or a part or parts thereof, including the enclosed space therein, intended for any type of use, and with the direct exit to a street or way or to a common area leading to a street or way." Based upon the definition of a condominium unit under the statute, it didn’t appear that a PAD site without a building on it could be construed as a condominium unit and thereby confer fee simple ownership in the "owner" of the PAD site. Moreover, the statute also required that before a Master Deed can be recorded, it must be accompanied by "as built" plans certified by an architect or surveyor showing the floor plans of the "building" or "buildings" showing the layout, location, unit number and dimensions of the units." Without a building, no "as built" floor plans could be prepared and certified and thus it seemed that individual ownership of a PAD site could not occur until the building was constructed. Thus, the problem remained that the lenders would not lend and the retailers could not acquire their PAD sites until the building was built. This would defeat the objective of the developer in obtaining reimbursement of the PAD sites as soon as possible. It appeared that the development of the center could only go forward as an approved subdivision.

The solution to this problem turned out to be simple, but not so obvious. With the blessing of a title insurance company, a more literal and closer reading of the condominium statute was adopted. A construction trailer was ordered and placed on each PAD site. A surveyor or engineer was then asked to draw "as built" plans of each trailer for filing with the Master Deed, giving separate ownership to the trailer as a "unit" and granting the exclusive use of the surrounding PAD site to the unit owner with the right to "rebuild or alter" the unit and amend the Master Deed once construction was completed to include "as built" plans of the final unit. Under this arrangement, each retailer could obtain a fee interest in its "unit" and finance the construction of a building on the PAD site and the developer was able to obtain reimbursement of its initial outlay for the acquisition of the land. The condominium documents were drawn to address the governance of the common areas and the rebuilding or alteration of the units under a scheme whereby the trustees of the condominium and the declarant under the Master Deed must approve the alterations. As an added benefit, because construction was taking place within a unit and not on leased land, liens arising from the construction process could not affect the developer’s interest in the remaining land or the "common areas" of the condominium. While the invention of a construction trailer condominium may not win the favor of all construction lenders, it did succeed in this instance in solving a problem that threatened to delay and possibly negate a development of a major center that is now successfully operating in Massachusetts.

Mr. Hoffman is a Real Estate Transactions attorney in Holland & Knight’s Boston Office. He can be reached at 617-619-9274 or khoffman@hklaw.com