Community Dividend

The future of mixed-use development: A developer shares his views

Community Dividend speaks with Edina, Minn.-based developer Larry Laukka about his perspective on the state of mixed-use development in the Twin Cities.

Thomas Moore | Community Affairs Project Manager

Published December 1, 1998  | December 1998 issue

Larry Laukka, president of L.A. Laukka Development Company of Edina, Minn., recently spoke with Community Dividend about his thoughts and his perspective on the state of mixed-use development in the Twin Cities. Laukka, a prominent local developer, brings a wealth of experience and thought-provoking views on what it takes to do successful mixed-use development. We offer some of those views for your consideration.

CD: What is a mixed-use project?

Laukka: The pure definition, I believe, has a mix of three or more uses in a single facility. The generally accepted definition also incorporates planning for more dense use of land, and the use of development criteria that may be different from existing standards. The purist is likely to call this type of development simply a version of a planned unit development, or PUD.

The term multiple-use may more easily define what we call mixed-use. Whatever we wish to call it, mixed or multiple, the concept requires mixing different uses that are organized to make a viable project.

CD: Your role as the developer is to orchestrate the project by recruiting the architect, the planning designer, the lender, and working with local government. What is the government sector role?

Laukka: Government, heretofore, has served to organize and control development standards and reflect the interest of the electorate. These roles, unabated, tend to put government in an adversarial position with that electorate, and the results tend to be less than favorable. If we truly wish to modify existing patterns, as some levels of government are promoting, then local governments must assume a different role. This will require a level of "political will" that, in my experience, is seldom found when it comes to doing something different, or doing something in a different way.

The mix of initiative, experimentation and leadership needed to make mixed-use development happen cannot be provided by the private sector independently. The cliched "public-private" venture is one way to change our habits of building single-use, detached facilities that are service-inefficient and lead to more congestion. Government may also play a more important role in financing new schemes, as well. Site assembly and financing are specific areas where more government involvement may be needed.

CD: If you were to project the residential patterns of the Twin Cities during the next 25 years, what would you see?

Laukka: Demographics, incomes and financing are primary factors that influence housing decisions. However, the availability of public sewer service and access to roads are two key government decisions that hold great influence over the patterns of metropolitan growth. Congestion is quickly becoming another major factor affecting decisions regarding where we elect to live, work and play. This shaper of living patterns may cause us to submit to higher densities and encourage acceptance of mixed-use developments.

On the other hand, satellite communities and quasi-satellite communities are growing. This phenomenon reflects the national trend to break our historic reliance on our central cities and to avoid problems troubling core urban areas. Satellite communities placate mankind's inherent need for convenience and security. It appears that much of the growth away from central cities is a product of these factors, and they succeed because work and play opportunities are not too far away, while the center is still accessible.

As long as government continues to provide infrastructure for sprawl, at the same time offering no viable alternatives, I see more of the same. Still, congestion could become the catalyst for change. We will see.

CD: The impression that many commercial bank lenders have of a real estate developer is that of a traveling road show artist. The developer walks into the lender's office, rolls out sketches from the back of a napkin, and the budget of the project from the back of a matchbook. If the loan request is rejected, the developer moves on to the next lender without blinking an eye. What can you say to dispel this myth?

Laukka: The "back of the napkin" loan discussion scenario is passé today, particularly when one is dealing with a large-scale or complicated development. Most lenders expect the serious developer to come prepared with a package that was most likely prepared by professionals who understand the meaning of a bankable project.

The "back of the napkin" approach you referred to worked quite well when lenders knew their customers and understood the underlying proposal. Today's dealings are likely to involve parties that do not know each other. Furthermore, they involve concepts that are not tried and tested, and there is little history and few comparables to rely upon. I sense that many "new" deals go awry at this juncture, because the lender is wary of lending where he or she has not lent before.

CD: Why should the banking industry engage in financing mixed-use development projects?

Laukka: The real estate development business survives and prospers by correctly interpreting real demand or by creating a product that serves latent demand -- "build it and they will come." Mixed-use projects respond to our contemporary mandate to use land more efficiently, to enhance or redevelop under-utilized properties, and to provide more convenience.

The basis for mixed-use is increasing: the cost of improved land is escalating at rates out of synch with low-density projects, using antiquated sites is in vogue, the edge of development is moving further and further from services, and congestion is upon us.

Mixed-use development makes more sense financially than it has in the past. These projects offer lenders good opportunities.

CD: Do you think the real estate development industry has been labeled an industry that must be watched very closely?

Laukka: Every industry has players who need to be scrutinized; the real estate business is no different. Deals are analyzed and the lender determines if the player and the project are acceptable. It is pretty much lending as usual -- except when a project fails the "appraisal" test. Unfortunately, this often happens when there are no properties comparable to a new or different concept, such as a mixed-use project.

There is little mixed-use in the system for lenders to use in making comparisons. Maybe lenders should change their practice of lending based on "comps" and consider a new and more enlightened approach.

CD: What would be an enlightened approach?

Laukka: Bankers could use a hybrid team of real estate professionals for instance, with the team authorized to evaluate the "new" deal and to advise the lender accordingly. Lenders are good at evaluating numbers and personalities but much less skilled at evaluating real estate projects that cannot be compared to existing projects.

CD: In your many years of development, which project brings you the most personal satisfaction?

Laukka: Edinborough and Centennial Lakes in Edina were particularly gratifying in that they were genuine public-private ventures. Edinborough, the first and most difficult, included an office tower, a high-rise senior housing complex, a hotel and a large indoor public park facility that linked these areas with 392 modest-cost condominiums and the greater community.

CD: What makes Edinborough special?

Laukka: I spoke earlier of "political will," which encompasses vision, initiative and leadership. Edina's professional staff, along with its appointed and elected officials, joined with the private sector to accomplish something that neither group could do alone.

The planning manuals and other such standards were set aside in an effort to enhance the potential of one of the community's last major undeveloped sites. A storm water retention problem was solved, new public amenities were developed, a new financing tool was conceived, a new density level was achieved and a large number of modestly priced housing units were provided in a community renown for its affluent housing stock. This is political will at its best.

CD: Can you foresee more projects of this nature being constructed in an urban setting? If so, by whom?

Laukka: More projects like Edinborough and Centennial Lakes are waiting to be done. Many local units of government have come to learn the hows and whats of these two schemes but there are no takers yet. Someone will be encouraged to take the chance and find that they can have a development like one of these without betting the shop.