Adapting the Law to Mixed-Use Trend

Q: How has the development of mixed-use real estate progressed in Mexico?

A: The prevalence of mixed-use real estate has increased dramatically. Ten years ago, there were few mixed-use projects outside of Mexico City, but then they started cropping up in places like Monterrey and Guadalajara. From a legal perspective, the mixed-use buildings arrived before the law was adapted to them in many cities. This means there was no legal structure in place, until recently. For many years, lawyers had to adapt contracts to complement all the details that were not legally defined in the letter of the law. Now that the laws of many major cities have been updated, projects can be carried out easily and with more legal certainty.

Q: Now that the regulatory framework exists, what is the main concern for developers?

A: The first headache for developers is the zoning rules, especially when several properties must be combined to create a single project. In certain cases, the law treats the use of land as separate parcels, but in certain cases it can be mixed or averaged. Of course, the utilization coefficient is another factor that must be carefully considered by developers.

In certain states, the law does not recognize a building that combines residential, commercial and retail. There are certain requirements for each property type and when they are all combined, there are issues regarding project pricing. Retail, for example, needs to have more parking spaces than residential developments so developers then need to separate common areas and allocate a certain number to the residential portion and a larger portion to retail.

Q: To what extent is there a danger that large scale mixed use projects surrounded by residential areas can be stopped for environmental, social and administrative considerations?

A: There is a very real danger that these projects can be halted. The environmental impact these types of projects may have could be significant because the construction of greenfield projects typically generates high levels of environmental impact to local flora and fauna, as well as to neighboring properties. In a brownfield project, other risks crop up, such as preexisting environmental conditions, civil protection issues in case the demolition of the existing buildings affects nearby infrastructure. In this way, the closing down of projects is a real danger that developers face. The equivalent to class action lawsuits are now allowed under Mexican law in certain scenarios and, although they are uncommon at the moment, they may begin to increase in prevalence in the face of these large developments if not accepted by the neighboring property owners.

Q: What is your outlook for the real estate industry in 2018?

A: In mixed use, I think the industry should be optimistic. In most major cities, the price of land is skyrocketing so mixed- use buildings are the response to that. People do not want to live hours from their offices, which pushes them to buy a unit in a mixed-use property. This allows more people to live in the heart of the city and, due to demand, this is something that will not change. The trend is good for both developers and consumers because it offers a better quality of life.

The newly enacted federal Urban Development Law provides that municipalities have to be more open as to the zoning, maximum height, parking spaces, and mixed- use projects in a broader range of locations. I predict a lot of litigation and amparos as a result of this change. But the fact that the federal government has acted this way means that it is responding to this new trend and the need for better developed space in urban settings. Now municipalities will have to adapt to that.

The challenge will be to harmonize the civil law, which regulates title and construction contracting, with administrative law, which regulates zoning and construction from an administrative perspective, and with environmental law, which regulates the impact of these projects in nature and communities.