In his book, “Golden Gates,” author Conor Dougherty, who studied and wrote on housing issues for many years, wrote poignantly on the housing crisis. He noted, “Economics is billed as hard science, but the field is more subjective and political than its number-filled reports make it seem. Except when it comes to housing. On that subject, liberal and conservative economists were in almost universal agreement that the shortage of homes in high-growth places is a major and growing problem that hurts the lowest-income households the most.”
It is not surprising that the needs for housing address a kaleidoscope of individuals and families. Seniors from the baby boom generation nearing or at retirement need housing that is convenient to their future care and quality of life. Young individuals and their families look to their first homes with trepidation as they determine what they can afford, and where. Veterans who have served our nation, homeless in greater numbers now than in all of our history, focus on the simple yet elusive concept of a roof over their heads in a place they can call home. Those employed with modest incomes commute long distances due to the absence of affordable housing near their workplaces. Many college students, unable to afford tuition and housing, chose their education and learned how to “couch surf.”
In many respects, the housing crisis we now face was foretold for decades, complete with the most impacted demographics, yet it was pushed aside for convenience. Now, the housing crisis is the challenge of our time. Its solution can be our legacy.
Design and construction professionals needed to step up. One example in recent years was found in the American Institute of Architects, San Diego Chapter (AIA SD), when it spent a weekend at the county administrative building in support of Housing the Next 1 Million in San Diego (HN1M). Those professionals—in architecture, engineering, construction, and one lawyer—spent the weekend outlining each of the city’s districts, determining where, how, and when projects could be provided; and how public transportation corridors could be established to move populations closer to their work, and medical and educational facilities. For the construction professionals, it was an eye-opening experience. The lawyer, who could not draw a straight line, wrote an ordinance. Together, their findings and story boards—in the form of a charette (French for cart as a result of art and architecture)—were displayed to the public and provided to the city council.
While it certainly helped and did have some positive results, the gathering was a reminder of Alexis de Tocqueville’s 19th century observation in “Democracy in America”: “Without common ideas, there is no common action, and without common action men still exist, but a social body does not. Thus, in order that there be society, and all the more, that this society prosper, it is necessary that all the minds of the citizens always be brought together and held together by some principle ideas.”
So, much in the same way that CLM offers and promotes unique service opportunities, its members can and must gather in that same spirit of service to promote the exchange of knowledge, ideas, and efforts to address the housing crisis in America. Industry professionals, experts, insurers, brokers, service providers, and in-house and outside counsel can make a difference. It will require sustained effort, infinite patience, and recognition that solutions do not always come from the top-down, but, most times, from the community-up. In this context, the conversion of commercial and retail space into housing steps forward.
Getting Started
Unlike the backyard treehouse, a great deal of work is required before a shovel touches the blade to earth. Many malls or other commercial structures were likely designed and built in the 1960s through the 1980s. Many decades later, the development of surrounding residential and commercial structures, roadways, and other improvements have likely taken place. Thus, the initial concern involves land use.
Rezoning property will likely be required. In California, the courts have noted that conversion from commercial use to residential units likely requires rezoning. [See Foothill Communities Coalition v. County of Orange (2014) 222 Cal.App.4th 1302, 1315-1318]. Sometimes, a special use permit is required by the local municipality. Challenges from commercial to residential conversion under private Covenants, Conditions, and Restrictions (CCRs) can be successful, as noted in the Florida court decision in Luani Plaza, Inc. v. Burton (2014) 149 So. 3d 712. Thus, stakeholders must carefully plan and execute legal strategies to secure land use accordingly.
Conversion to residential units may also have a requirement for certain levels of density, height, and provision for housing across diverse income levels. In Florida, county adoption of affordable housing initiatives may affect the development. (See Florida Statutes Annotated, Sections 420.9072 and 420.9076).
Given the passage of multiple decades, compliance with the body of administrative regulations often requires revisiting environmental impact evaluations. An Environmental Impact Report (EIR) may well be required, for instance in California. Further, multiple agencies may be impacted and require compliance with the California Environmental Quality Act. [See American Canyon Community United for Responsible Growth v. City of American Canyon (2006) 145 Cal. App. 4th 1062, 1071]. This may extend the scheduling for, and affect the financing of, the project.
Up to Date
Lead made great paint. It was used in the past, but is unlawful now. Asbestos, anyone? Its presence requires that its safe removal, mitigation, and disposal meet rigorous requirements. The Texas Legislature required compliance with current building codes. (See 26 Texas Administrative Code Section 559.42). Not to pass up on revenue, Texas also requires that contractors involved in reconstruction of nonresidential property obtain Texas sales and use tax permits. [See 34 Texas Administrative Code Section 3.357 (b)].
Framing and features to ensure earthquake compliance? We are many codes later. Access for the disabled? The Americans with Disabilities Act and state legislation require access. Most states, like California, require compliance as a matter of state law as well as federal law. This can affect a variety of features in the building as well as the timing of completion.
Next Steps
Once the initial concerns regarding zoning, regulatory compliance, and removal of hazardous materials are addressed, the focus on the design for new improvement continues. Once a project delivery method is selected, there are decisions on what can be reused and what cannot.
Most commercial buildings and malls have infrastructure that is out of date, including power supply, utilities, and internet access. Of importance are vapor barriers. When initially designed, malls and commercial buildings presupposed that users would only be there for a matter of hours. It is quite different to house a population on a continuous basis. As a result, rigorous peer review on design, material selection, and construction brings value and avoidance of risk at the outset of the project.
Since the role of insurance is critical for economic investment and stability for any project, the underlying commercial building or mall carries greater risk. It not only has a prior track record, but also a more significant risk profile because of its repurposed function. There are questions regarding the future performance, as it is not a new structure with contemporary materials. Thus, as noted in Florida, there are more factors that can increase the cost of insurance for the project.
Texas follows several states that may consider a construction defect to be an occurrence; however, it is potentially excluded as “your product” or “your work.” [See North American Shipbuilding, Inc. v. Southern Marine & Aviation Underwriting (1996) 930 S.W.2d 829, 832-834]. Thus, there is no guarantee that the result of the reconstruction itself is a third-party insurable risk. Moreover, Texas case law has noted that replacement cost coverage must be in kind. In that regard, the coverage for an office park was not considered a replacement for apartments destroyed by fire. [See Fitzhugh 25 Partners, L.P. v. Kiln Syndicate KLN (2008) 261 S.W.3d 861].
Malls Are Dead, Long Live Malls
In a June 30, 2023 Forbes article, it was noted that senior housing projects may have a greater chance of public approval when they involve converted shopping malls: “Sophia at Fox Valley and Sophia at Hawthorn Mall are by no means the only examples of what appears a nascent trend. In Irondequoit, N.Y., the old Irondequoit Mall’s Sears store has yielded to a new, amenity-filled 157-residenceb senior housing community called Skyview Park. In Seattle, the onetime parking lot of one of the nation’s first malls, Northgate Mall, has been transformed into Aljoya Thornton Place, a 143-unit retirement community on the Emerald City’s northeast side.”
The Dec. 9, 2024, edition of the New York Post likewise states: “Living at the mall—inside the rise of apartments at America’s shopping centers.” The article, authored by Mary K. Jacob, focused on the evolution of malls into residential units, noting that the suburban retail centers of the 1970s and 1980s have new life. The article noted projects in Colorado at the Flatiron Crossing Mall and in New Jersey at the Garden State Plaza as examples of this growing trend.
Additionally, the prospect of converting malls into living space addresses the greater capacity for housing units. For example, Jacob noted that the Paradise Valley Mall in Phoenix, Arizona netted 400 housing units. Additionally, the Lafayette Square Mall in Indianapolis, Indiana created 1,200 apartments. Like many of these projects, there are opportunities for fulfillment of affordable housing initiatives.
Some projects have resulted in mixed use as well. These include The Arcade, in Providence, Rhode Island; and the Grand Avenue Mall, in Milwaukee. These projects feature retention of some retail and related amenities for residents in their apartments. With the U.S. estimated at four times the amount of retail space than any other nation, Jacob concluded that the conversion of malls into residential opportunities will continue for many years to come.
So, who is likely to participate in these endeavors? In a Dec. 8, 2024 Forbes article, “From Retail to Rentals: How Empty Malls Became Housing Solutions,” author Chris Westfall noted that there are 4.5 million homes needed to meet present demand. Malls across the U.S. represent over 30 million square feet of retail, most of which is vacant. The author noted that realtors, renters, and home buyers should “meet at the mall.”
Malls are frequently located near more convenient transportation infrastructure, have ample parking space for staging and demolition activities, and typically have had a history of a customer base. These blend to form a unique convergence of interest for developers, builders, designers, real estate professionals, and those seeking housing. In short, the demise of the brick-and-mortar mall through online shopping can, in happenstance, serve as a catalyst for new housing opportunities.
The Role of Insurance
From an insurance perspective, a great deal of planning is required. First, the model of delivery needs to be established early: Will the project be an owner-bid-build, or an alternative delivery method like design build, construction manager at risk, or some other form? Second, do the developer, design, and construction interests want to pursue an owner-controlled insurance program (OCIP) or some other collective interest policy?
These are critical decisions that will factor in the cost of the development. Quite often, a market may be available for an OCIP whose premium would be factored, based on risk, as a percentage of the value for the project. While some may shy away from the cost, as a factor of construction budget, it can be a convenient way to procure insurance with favorable coverage features.
To the extent that each interest will insure themselves separately, market capacity needs to be assessed. Converted projects typically involve some greater measure of risk, and thereby premium. The value of the project in the context of the insurance profile of a designer may result in the necessity to purchase a project-specific policy, which will be factored into their professional fee.
Some of the risk profiles to consider during construction for each project will include:
• Property damage for replacement of damaged materials or equipment.
• Course of construction accidents for operations in progress.
• Delays occasioned by weather, cyberattack, and supply chain events.
• Vandalism due to the proximity of such projects to transportation hubs.
Completed operations coverage will need to address the issues related to damage from acts or omissions of owners, contractors, designers, specialty contractors, vendors, and product manufacturers. Many insurers would focus on risk management for the project to include personnel safety, cybersecurity, peer review, and third-party inspection requirements. Further, as these mall-conversion projects are typically situated in areas where there are surrounding infrastructure improvements, and commercial and/or residential facilities, risk management will also have to encompass a variety of additional exposure factors.
Early and close consultation with qualified insurance brokerage professionals and underwriters is key to ensuring that risk is accounted for, equitably distributed, and factored into the essential budgetary costs for the project. The scope of insurance coverage needs to be broad and not “value engineered” to the bone. A checklist of some coverage risks being considered include:
• General liability.
• Workers’ compensation.
• Property insurance.
• Business interruption insurance.
• Commercial auto.
• Equipment insurance.
• Professional liability.
• Pollution insurance.
• Cyber insurance.
• Umbrella insurance.
The housing crisis is a challenge. Its solution can be our legacy.
About the Author:
Howard Franco, Jr. is an attorney at Collins + Collins LLP. hfranco@ccllp.law