Property rights litigation: Challenges, risks and financial settlement in the case of the Thompson Valley Towne Center

Journal of Real Estate Practice and Education, 2002 by Holsapple, Eric, James, Bruce A, Worzala, Elaine M

Focus

The purpose of this case is to provide students with an example of a mixed-use development involving significant property rights litigation, which ultimately forced the developers to offer a financial settlement. The settlement was necessary to ensure that development occurred in a timely fashion and that the anchor tenant (a grocery store) would fulfill its lease obligations. The case takes the student through the development process initially focusing on site selection and then litigation with the former property owners prior to and subsequent to closing on the property. The case concludes with a financial analysis to determine the maximum dollar amount the developers could pay to settle the legal disputes while maintaining a profitable development. Additionally, the case highlights the importance of the legal/political attributes of the real estate development process.

Setting

The authors use a real estate development firm to examine the entitlement process and litigation problems that can be associated with gaining marketable title to land. The case involves the acquisition and entitlement of land for the development of a mixed-use project encompassing commercial and residential activities. The case outlines how one firm dealt with the trade off between paying settlement costs in litigation versus related pre-development costs paid during the entitlement process.

Exhibits

Exhibit 1: Map of Loveland, Colorado

Exhibit 2: Map of Alternative Development Sites

Exhibit 3: Map of the Thompson Valley Site

Exhibit 4: Aerial View of Thompson Valley Towne Center

Exhibit 5: "Zoning Bubbles" for the Thompson Valley Towne Center General Development Plan

Exhibit 6: Illustration of the Various Litigation Proceedings

Exhibit 7: Timeline of Critical Events

Exhibit 8: Site Valuation After Successful Entitlement and Ownership (Annexed and Zoned)

Availability

The case is available for cost plus shipping charges at the American Real Estate Society Case Center, Graduate Program in Land Development, Texas A&M University, College Station, TX, 77843-3137. (Email: sharkawy@archone.tamu.edu.)

Teaching Notes

The teaching notes emphasize the main focus of the case. The analysis of the case provides the methodology to analyze the financial feasibility of settling litigation versus the continuation of litigation with an unknown outcome.

Introduction

In August of 1996, Eric Holsapple went to work with Loveland Commercial as a broker and developer of commercial real estate. Holsapple's prior experience included the development of shopping centers and other commercial properties. His partner, Don Marostica, was experienced in residential subdivisions and the land entitlement process in the City of Loveland, Colorado. The intent of the partnership was for Holsapple to assist Marostica with the completion of three residential subdivisions currently in the entitlement process and to secure additional development opportunities in the City of Loveland, a rapidly growing community in the Northern Front Range of Colorado. In particular, the team desired to develop a large, multi-use project that would include a community shopping center, which would generate long-term cash flow for the partners. Both partners were licensed real estate brokers and worked as conventional commercial brokers to cover their overhead and living expenses while completing the new developments, which they anticipated would take two to four years to complete and stabilize at which time they would generate a positive cash flow. To begin the process, Holsapple began to contact potential anchor grocery stores in order to determine the current demand for a community-based shopping center in the Loveland market. He also began the process of searching for suitable commercial and mixed-use development sites in the area.

Site Search

During the research phase, Holsapple found that Steele's Market (a local, familyowned grocery store) was interested in an expansion into the Loveland market. Additionally, a major national grocer, Safeway, had been under option for a 30-acre site in the northern part of the city on a site called Windsong (see Exhibits 1, 2 and 3 for maps of Loveland and the various site options). Safeway, however, determined that the Windsong site had a poor cross traffic intersection (i.e., the cross street did not connect to another major street) and Safeway's demographic profile showed the site as "green" (i.e., not quite enough population base to support a new store).

Therefore, in early 1997, Safeway let its option expire and was in the market for another site.

Holsapple knew of a 10-acre site further north with a superior intersection. After researching the ownership records, he found the site was owned by a family trust and representatives stated they would be interested in a ground lease agreement, as they did not want to sell the land. Located in the county, the land needed to be annexed into Loveland and zoned for commercial use. Holsapple gathered the information and presented the ground lease site to both Steele's Market and Safeway. At the same time, the developers presented a land lease agreement to the trust's attorney for review. Subsequently, however, a family dispute led to the family trust's decision not to list the land for development.