Reciprocal Easement Agreements: Structuring and Amending REAs for Retail and Mixed-Use Project Development

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Reciprocal Easement Agreements: Structuring and Amending REAs for Retail and Mixed-Use Project Development Protecting Rights and Obligations, Minimizing Risk for Developers, Retailers and Other Project Constituents WEDNESDAY, JUNE 21, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Janet L. Bozeman, Principal, Hyatt & Stubblefield, Atlanta Kathleen Dempsey Boyle, Partner, Meltzer Purtill & Stelle, Chicago The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Reciprocal Easement Agreements: Structuring and Amending REAs for Retail Development Janet L. Bozeman Hyatt & Stubblefield, P.C. 233 Peachtree St. NE, Suite 1200 Atlanta, Georgia (404)

6 Reciprocal Easement Agreements: Structuring and Amending REAs for Retail Development I. Overview of REAs II. Drafting Effective REAs 6

7 I. OVERVIEW OF REAs What is an REA? Contract + Easement + Affirmative and Negative Covenants Contract between/among signatories and a conveyance of common, limited common and exclusive rights which tie a project together based on the current vision of its developers 7

8 Also called: Construction, operation and reciprocal easement agreement (COREA) Shared use agreement Declaration of covenants, conditions, restrictions and easements (CC&Rs) Development, operating and reciprocal easement agreement Multiuse agreement 8

9 Traditional Uses Neighboring property owners want to develop their properties as one integrated shopping center (mall) Developer wants to develop property as a single shopping center but sell components or out-parcels Property owners desire to share facilities or amenities (shared parking or drainage facilities) Industrial park 9

10 New Face of Retail: Mixed Use Developments Single building with two or more owners (ground floor retail with residential, office or hotel on top) Commercial or mixed-use development with a uniform design/appearance and private roads Resort project with recreational, residential, hospitality and retail uses Mixed uses around attractions arenas, sports facilities and hotels 10

11 New Urbanism Master planned community with retail mixed throughout or central business district Reinventing village concept Trend for governmental entities to provide fewer services not accepting responsibility for roads, trash service and sometimes even fire protection or police services 11

12 Preliminary Considerations Quantity and types of property owners involved (now and in the foreseeable future) Building components and the shared uses o o o o o o Parking Pedestrian access Utilities Building systems Life safety systems (fire suppression, fire escape) Encroachments 12

13 Preliminary Considerations Plan for maintenance and operation o o o o o o o Utilities Cleaning Beautification (flowers, decorations, etc.) Routine maintenance Security Repairs Renovations and alterations 13

14 II. DRAFTING EFFECTIVE REAs A. Identify and Describe Project Components Describe all of the shared project components in a precise manner to help ensure that all necessary easements are created and allocate maintenance responsibility for each component. Legal descriptions can become complex. 14

15 A. Identify and Describe Project Components 1. SHARED USE COMPONENT Property, an improvement or piece of equipment that benefits or will be used by more than one parcel. Can be located entirely within one parcel or within multiple parcels. 15

16 A. Identify and Describe Project Components 1. SHARED USE COMPONENT Parking facilities (including subsurface garages underneath parcels) Driveways or private roads Loading docks Elevators, escalators and stairwells Plaza, courtyard, atrium or lobby Sidewalks and pedestrian thoroughfares Signage Public restrooms Stormwater runoff and drainage facilities Utility lines Skywalks Party walls 16

17 A. Identify and Describe Project Components 2. COMMON BUILDING COMPONENT Building element that benefits more than parcel Foundation Roof Support column 3. SHARED BENEFIT COMPONENTS Properties or items within one or more parcels that may not be physically used by all parcels but provide a benefit to more than one parcel Management or security offices Janitorial and maintenance facilities Lake, fountain or public art Common area lighting 17

18 A. Identify and Describe Project Components 4. EXCLUSIVE COMPONENTS Items or equipment located within one parcel that exclusively serves another parcel Elevators that serve only upper floors Utility pipes, lines and ducts that go through one parcel to serve another parcel Rooftop HVAC or antennae Encroachments (awnings, signage, building components) 18

19 B. Create Appropriate Easements Easements will depend upon design and intended uses Describe with specificity the burdened and benefitted properties or parties Specify that agreement runs with the land Specify whether appurtenant (for the benefit of property, not a particular owner) or in gross (for the benefit of a particular person; terminates when person is no longer the property owner) 19

20 C. Particular Easements 1. CONSTRUCTION, MAINTENANCE AND REPAIR Provide an easement through another owner's parcel for the purpose of constructing initial improvements, performing routine maintenance, repairing or reconstructing (after a casualty) the initial improvements and, if appropriate, altering and renovating the initial improvements. 2. SUPPORT AND ENCROACHMENT Provide an exclusive easement to attach improvements to or receive support from another parcel. 20

21 C. Particular Easements 3. EXCLUSIVE COMPONENTS Provide an easement for the purpose of installing, maintaining and using the item. 4. ACCESS EASEMENTS FOR SHARED USE COMPONENTS 5. INTENDED USE Easements over another's property should generally be restricted to the intended use of the item. 6. VIEW EASEMENT Exclusive or limited rights for sight, views, air and ventilation. 21

22 D. Term of Instrument Identify items that are perpetual (if any) Identify those that expire o o Duration of restrictive covenants may be limited by state law Affirmative election to renew or automatic renewal Termination with the consent of all parties or some majority (changed circumstances) 22

23 E. Construction 1. APPROVAL OF PLANS If project components will be constructed by different owners, the design of the different improvements will affect other parcels. Maybe have approval over only certain aspects of design Standards for disapproving Approval not unreasonably withheld 2. CONSTRUCTION SCHEDULE If construction of adjacent improvements affects or is critical to the construction or operation of other improvements, include commencement obligation, required completion date, milestones and appropriate remedies. 23

24 E. Construction 3. COORDINATION AND COOPERATION Parcel owners should be obligated to work together and communicate regularly to complete the entire project on schedule or where reconstruction or renovation of existing improvements impacts other parcels. May need to address hours of construction, staging and storage areas, and temporary facilities and utilities. Restrict other owners from interfering with construction activities or taking action that increases construction costs. 24

25 E. Construction 4. CONSTRUCTION STANDARDS Design guidelines o o o o Setbacks Building envelopes Building heights Curb cut locations Good and workmanlike manner using quality materials Good construction and engineering practices 25

26 F. Affirmative and Negative Covenants 1. PROHIBITED USES OR USES REQUIRING APPROVAL Exclusivity/competition concerns Quality of vendors some debate about what "first class" means Types of commercial uses (particularly in mixed-use project) Limits on signs, sidewalk sales, etc. Airspace development rights 2. PREFERRED USE RIGHTS Reserved or restricted parking (e.g., bank parking can be used by restaurant at night) 26

27 F. Affirmative and Negative Covenants 3. MAINTENANCE OBLIGATIONS Generally each owner maintains its own private or exclusive use area Obligate someone to maintain common areas o Developer (but contemplate exit strategy) o Primary property owner o Large anchor owner (preferably one with maintenance/management experience, such as hotel) o Business association o Homeowners association in a mixed-use project Not all components need to be addressed the same 27

28 F. Affirmative and Negative Covenants 4. ALLOCATE SHARED COSTS Determine a method for allocating costs for shared components among benefitted parties Can be difficult to conceive of what may be fair to all at the outset Make sure there is flexibility to change allocations or add/subtract cost categories Allocation should bear some relation to type of shared item, intensity of use and benefit received 28

29 F. Affirmative and Negative Covenants 4. ALLOCATE SHARED COSTS (continued) Consider whether some uses should be charged less/subsidized by other uses (e.g., church, arts and other nonprofit or low profit uses) Consider whether some uses should be charged less because they support or provide amenities to retail customers (food court vendors, newsstand or convenience store) Include payment obligations, terms and remedies for nonpayment Audit rights 29

30 Common Methods for Allocating Liability for Common Expenses Fixed percentage allocations o Arbitrary allocation (e.g., split) Percentage based on land use/load factor in relation to other uses; assign "points" or "equivalent units" o Land points based on size of parcel o Points based on linear feet of road frontage o Building points based on square feet of gross floor area within structures o Use points based on land use classification o Combination of the above Fluctuating percentage based on value or actual use/intensity of use o Percentage of sales o Quantity of parking spaces used 30

31 All undeveloped Parcels SAMPLE MIXED-USE EQUIVALENT UNIT ALLOCATION Land Use Classification Equivalent Units 0.60 per acre of land (prorated by onehundredth of an acre) Paved and striped, revenue-generating surface parking areas Retail and service establishments including, without limitation, banks (including ATMs) and other financial services and institutions, travel agencies, and service stations Restaurants (excluding restaurant and bar areas within a hotel which are reserved primarily for the convenience of and use by hotel guests only), bars, nightclubs Entertainment including movie theaters, dinner theaters, theme-based attractions, stand-alone attractions (e.g., Ferris wheel, carousel), sports arenas, etc. Hotel rooms and time-share units Art galleries, museums, places of worship, libraries, nonprofit educational, research, or cultural institutions Office or medical facility Industrial or light industrial uses, including warehouse, mini-storage, and manufacturing facilities Residential units (single family attached or detached, condominium, and rental apartment units) 0.10 per marked parking space 1 per square foot of gross floor area 1 per square foot of gross floor area 1 per square foot of gross floor area 60 per hotel room or time share unit 0.15 per square foot of gross floor area 0.15 per square foot of gross floor area 0.15 per square foot of gross floor area 60 per dwelling unit 31

32 F. Affirmative and Negative Covenants 5. INSURANCE REQUIREMENTS Identify risks that must be insured Minimum liability amount and maximum deductible Minimum rating for insurer Parties to be named as additional insureds Whether parcel owner may self-insure (particularly for governmental entity) 32

33 F. Affirmative and Negative Covenants 6. CASUALTY PROVISIONS Obligation to rebuild for critical items Circumstances under which owner does not have to rebuild Time frame during which must be rebuilt Construction procedures and obligations Clearing of premises 33

34 F. Affirmative and Negative Covenants 8. TRANSFER RESTRICTIONS When identify of owner is a concern Require approval to transfer Approval may not be unreasonably withheld or approval rights limited Purchase right if do not approve sale Do not limit foreclosure sales or deeds in lieu of foreclosure 9. GENERAL INDEMNITY PROVISIONS Indemnify for activities arising out of indemnitor's parcel Mechanic's and materialmen's liens 34

35 G. Remedies Termination is not appropriate remedy in most cases Injunctive relief Self-help (right to enter the property and complete improvements or assume maintenance at the defaulting party's expense) Financial penalties (liquidated damages) Construction bond, completion guaranty or other assurance of timely completion Force majeure clause 35

36 H. Mortgagee Provisions Give lender notice of owner's default and opportunity to cure Give estoppel certificates to owner's mortgagee or prospective mortgagee Pre-existing mortgage company needs to consent to REA and subordinate its interest to REA to avoid wiping out the REA in the event of foreclosure 36

37 I. Drafting Considerations 1. Leverage of anchors is significant. 2. If one of the participants is a governmental entity, a change in administration can produce significant policy changes. 3. Strike a balance between sufficient limitations/descriptions of future development to protect rights of pioneer developers without imposing unworkable limitations. 37

38 I. Drafting Considerations 4. Make cost allocations fluid and easily amendable. Do a budget and work backwards to create a methodology that the market will accept. 5. Master Association Scenario (Mixed-Use) Give commercial appropriate protections/voting rights Don't allow residential to unduly restrict or control commercial operations but give residential reasonable protections to allow peaceful enjoyment of residences Don't unduly burden commercial with association participation or meeting requirements 38

39 Janet L. Bozeman Hyatt & Stubblefield, P.C. 233 Peachtree St. NE, Suite 1200 Atlanta, Georgia (404)

40 Reciprocal Easement Agreements: Structuring and Amending REAs for Retail and Mixed-Use Project Development Kathleen Dempsey Boyle Meltzer, Purtill & Stelle LLC 300 South Wacker Drive, Suite 2300 Chicago, Illinois (312)

41 Protecting Rights and Obligations, Minimizing Risk for Developers, Retailers and Other Project Constituents III. Common Pitfalls with REAs IV. Amending Existing REAs

42 III. Common Pitfalls with REAs A. Define the scope of the property subject to the REA. B. Anticipate different ownership of different parcels. C. Anticipate changing uses. D. Consider the long-term nature of the relationship. 42

43 A. Scope of Property Subject to REA Is entire property subject to all benefits and burdens of REA? Styles of REAs initially retail All parcels included in definition of shopping center subject to every benefit and obligation. Exception differentiation of major stores. REA has a subset of less onerous obligations that apply to a portion of the property, such as outparcels. 43

44 A. Scope of Property Subject to REA (cont d) Overall REA that focuses on access across entire property, then sub-reas that restrict height, access and uses on individual parcels. Focus on geography of property both internal and in relation to surroundings. Topography of site. Infrastructure and type of development surrounding site. 44

45 SHOPPING CENTER AND OUTPARCELS 45

46 B. Anticipate different ownership of different parcels Might some parcels be peeled off from main property? (e.g., phased mixed use projects) Possibly not subject to entire REA? Subdivide parcels now or later? Portions of property developed by different developers with different expertise (e.g. senior housing and drugstore-anchored strip center). How much interaction is really needed after development once design parameters, utilities, access and parking are established? 46

47 B. Anticipate different ownership of different parcels (cont d) Be prepared for phasing. Maintenance standards before development. Compensation for original phases of work that benefit subsequent phases. Accept that there will be fluctuations in market demand and/or financing issues. Example shopping center REA limiting nonretail uses to 5% or 10% of shopping center. 47

48 C. Anticipate Different Uses or at least avoid being too onerous in requiring contemplated uses What is non-retail? Theaters Restaurants Service businesses banks, brokerages, insurance and travel agencies Medical office Spas Health clubs Pick-up of products ordered on-line Tech services 48

49 C. Anticipate Different Uses (cont d) or at least avoid being too onerous in requiring contemplated uses What issue is REA actually addressing when imposing restriction: Parking Traffic Management Access Signage View Corridor Aesthetics 49

50 C. Anticipate Different Uses (cont d) or at least avoid being too onerous in requiring contemplated uses Are use restrictions being used to manage parking and related matters? Perhaps focus on the issue parking protections. Aesthetics discount stores focus on harmonious exteriors. Noxious uses change over time Pet store now potentially desirable national big box chains. Veterinarian s office. 50

51 C. Anticipate Different Uses (cont d) or at least avoid being too onerous in requiring contemplated uses Tire store/garage again, national chains. Food sales Not near my clothing store! Now grocery stores fill anchor spaces. Think of use changes affecting cost sharing obligations Example: REA with shared access road for multifamily and single family developments. Costs are allocated among all Dwellings. What happens if one parcel becomes retail shopping center? 51

52 D. Consider the long-term nature of the relationship Who administers the obligations? Need exit strategy for developer and smooth transition to.whom? Architect/Architectural Committee for aesthetic review common error Largest parcel owner common fallback Party with most activity and need for high standard of maintenance (often retail) Party who cares the most (might be residential constituents are right there) Homeowners or mixed use association 52

53 D. Consider the long-term nature of the relationship Remedies and Enforcement REA parties often the only enforcers. Tenants rely on lease language requiring REA enforcement by landlords. Remedies. Self help for maintenance. Lien rights for reimbursement. Equitable remedies restraining orders and injunctions. All rights and remedies, but avoid termination. 53

54 D. Consider the long-term nature of the relationship (cont d) How much interaction among owners is desirable? Consider limiting interaction among different classes of users once basic parameters set in REA Example: Low rise urban infill development retail on first floor, office in some buildings, condo in mid-level buildings. Condo shares parking with retail/office in some parking decks exclusive floors Retail owner maintains center Limited interaction but for CAM payments 54

55 D. Consider the long-term nature of the relationship (cont d) Who are REA parties throughout the term? REA covenants, benefits and obligations run with the land. Does REA address whether and how a buyer becomes a successor REA party? Need affirmative guidance as to whether new owner automatically becomes REA party or how new REA party is recognized by others. New owner may not have right to be REA party, only subject to REA. Address change in voting rights among existing REA parties if new owner does not have right to become REA party. 55

56 D. Consider the long-term nature of the relationship (cont d) What happens if new owner is REA party but does not participate? Limit the topics subject to approval rights. Deemed approval if no response. Self-help and lien rights. Insurance and indemnity obligations. Consider escalation of coverage amounts. Rely on external policing (e.g., lenders, public companies). Focus indemnities on responsibility for actual parcel or premises and activities, including management of common areas. Waiver of subrogation. 56

57 D. Consider the long-term nature of the relationship (cont d) Many shopping center REAs have expired or are about to expire. Can the parties operate without an REA? Amend REA or amend and restate REA? Convert to access, parking and utility easements and limited REA only, particularly if uses have changed? Use two party agreements or fewer than all parties? 57

58 IV. Amending Existing REAs A. Approaches and Strategies. B. Short term gain vs. long term pain resurrecting failing shopping centers. C. Role of strong tenants that are not REA parties. D. Role of Governmental Entities. E. Keeping lenders comfortable. F. Conclusion. 58

59 A. Approaches and Strategies Amend vs. amend and restate. How extensive are needed changes? Confirm if prior REA should be terminated and superseded. Removes obsolete concepts such as onerous plans approval or outdated signage requirements. New parties may not want to be immersed in the details. Beware of deleting too much lender expectations (insurance, casualty, condemnation, succession). 59

60 A. Approaches and Strategies (cont d) If amendment, consider using a light hand. Perfection vs. practicality many reviewers. Examples: Construction provisions vs. alterations; plans review. Parties focus is likely different from parties at inception of REA. Unrecorded Supplemental Agreements or Approved Letters. Obtain approvals one REA party at a time. 60

61 A. Approaches and Strategies (cont d) Expense Allocations. Is simplification warranted? Interior vs. Exterior CAM for retail developments? More maintenance by parcel owner with limited CAM requirements for common areas. Impact of outparcels access road maintenance only? Impact of mixed use again, only common elements? 61

62 B. Short Term Gain vs. Long Term Pain Resurrecting Failing Shopping Centers Often need REA amendment to bring new tenant to center with formerly precluded use. Consider impact of changes on all interested entities (not just REA parties). Consider loosening standards to bring people to center. Outdoor sales farmer markets, art fairs, car shows. Restaurant outdoor patios. 62

63 B. Short Term Gain vs. Long Term Pain Resurrecting Failing Shopping Centers (cont d) Balance the need to stop erosion of tenant quality with the demands of new tenants. Discount tenants Junior anchors Grocery stores Gas stations Different Uses Retail to Entertainment Retail to Offices 63

64 OFFICE USE 64

65 C. Role of Strong Tenants That Are Not REA Parties Sometimes overreaching regarding control areas and restrictions. Contractual obligations that expire when lease does. Subject to existing exclusives and restrictions. How broad is impact of tenant s restrictions on future development? Control over access roads and view corridors. 65

66 C. Role of Strong Tenants That Are Not REA Parties (cont d) Understand the nexus between requested restriction and economic impact on both tenant and development. Use concepts from junior anchor and big box leases when crafting REA amendment. Tie restriction to actual use, with automatic expiration when use is no longer at center or certain portion. Consider control areas rather than total frozen site plan. Consider approval rights over limited geographic areas. 66

67 C. Role of Strong Tenants That Are Not REA Parties (cont d) Consider impact of restrictions on redevelopment activities such as anchor store buildings. Sign numbers tied to entrances. Signs for identification only. Limited number of pylon sign spaces. For outparcels, limits on monument signs or signs per side of building. Exterior aesthetics limited number of storefronts per building, overall conformity vs. national prototypes. 67

68 D. Role of Government Entities Municipalities more active. Stronger signage ordinances. Parking restrictions ratios, handicapped parking. Traffic management. Off-site improvements. Aesthetics. Expect REA amendment review in connection with redevelopment. 68

69 D. Role of Government Entities (cont d) Use of municipal restrictions in REA amendment. Sign provisions vs. municipal sign requirements. Zoning. Parking ratios. Off-site improvement requirements and revenue generation. PUD s. Issues may flow through to REA amendment. 69

70 E. Keeping Lenders Comfortable Collateral Protection. Casualty/Condemnation, insurance. Limited lender liability. Include customary protections if lender steps in for REA parties. Use customary lender requirements for financeability as protection for all stakeholders. 70

71 CONCLUSION REAs have regularly been in effect for shopping centers and mixed use developments for more than fifty years, so past experience will help serve as a guide for future REAs as retail and mixed use projects develop and redevelop. For successful projects that stand the test of time, drafters must work to keep a fair balance of the benefits and burdens among stakeholders over the term of the REA. 71

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