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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

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, JUNE 21, 2017

Janet L. Bozeman, Principal, Hyatt & Stubblefield, Atlanta Kathleen Dempsey Boyle, Partner, Meltzer Purtill & Stelle, Chicago

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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 30303 jbozeman@hspclegal.com (404) 659-6600

Reciprocal Easement Agreements: Structuring and Amending REAs for Retail Development

I. Overview of REAs II. Drafting Effective REAs

6

What is an REA?

Contract

+

Easement

+

Affirmative and Negative Covenants

• I. OVERVIEW OF REAs

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

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

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
• r amenities (shared parking or drainage

facilities)

• Industrial park

9

• Single building with two or more owners

(ground floor retail with residential, office

• r 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 New Face of Retail: Mixed Use Developments

10

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

• Quantity and types of property owners

involved (now and in the foreseeable future)

• Building components and the shared uses
• Parking
• Pedestrian access
• Utilities
• Building systems
• Life safety systems (fire suppression,

fire escape)

• Encroachments

Preliminary Considerations

12

• Plan for maintenance and operation
• Utilities
• Cleaning
• Beautification

(flowers, decorations, etc.)

• Routine maintenance
• Security
• Repairs
• Renovations and alterations

Preliminary Considerations

13

• 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

• 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.

A. Identify and Describe Project Components

15

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

• 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

A. Identify and Describe Project Components

17

• 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) A. Identify and Describe Project Components

18

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

• wner) or in gross (for the benefit of a

particular person; terminates when person is no longer the property owner)

19

• 1. CONSTRUCTION, MAINTENANCE AND REPAIR

Provide an easement through another

• wner's parcel for the purpose of

constructing initial improvements, performing routine maintenance, repairing

• r 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. C. Particular Easements

20

• 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. C. Particular Easements

21

• Identify items that are perpetual (if any)
• Identify those that expire
• 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) D. Term of Instrument

22

• 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

• peration of other improvements, include

commencement obligation, required completion date, milestones and appropriate remedies. E. Construction

23

• 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. E. Construction

24

• 4. CONSTRUCTION STANDARDS
• Design guidelines
• Setbacks
• Building envelopes
• Building heights
• Curb cut locations
• Good and workmanlike manner using

quality materials

• Good construction and engineering

practices E. Construction

25

• 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) F. Affirmative and Negative Covenants

26

• 3. MAINTENANCE OBLIGATIONS
• Generally each owner maintains its own

private or exclusive use area

• Obligate someone to maintain common

areas

• Developer (but contemplate exit

strategy)

• Primary property owner
• Large anchor owner (preferably one

with maintenance/management experience, such as hotel)

• Business association
• Homeowners association in a mixed-use

project

• Not all components need to be addressed

the same F. Affirmative and Negative Covenants

27

• 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 F. Affirmative and Negative Covenants

28

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

• r provide amenities to retail

customers (food court vendors, newsstand or convenience store)

• Include payment obligations, terms

and remedies for nonpayment

• Audit rights

29

Common Methods for Allocating Liability for Common Expenses

• Fixed percentage allocations
• Arbitrary allocation (e.g., 50-50 split)
• Percentage based on land use/load factor in relation

to other uses; assign "points" or "equivalent units"

• Land points based on size of parcel
• Points based on linear feet of road frontage
• Building points based on square feet of gross floor

area within structures

• Use points based on land use classification
• Combination of the above
• Fluctuating percentage based on value or actual

use/intensity of use

• Percentage of sales
• Quantity of parking spaces used

30

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

31

• 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) F. Affirmative and Negative Covenants

32

• 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
• bligations
• Clearing of premises

F. Affirmative and Negative Covenants

33

• 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

F. Affirmative and Negative Covenants

34

• 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

G. Remedies

35

• 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 H. Mortgagee Provisions

36

• 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. I. Drafting Considerations

37

• 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
• r 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 I. Drafting Considerations

38

Janet L. Bozeman Hyatt & Stubblefield, P.C. 233 Peachtree St. NE, Suite 1200 Atlanta, Georgia 30303 jbozeman@hspclegal.com (404) 659-6600

39

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 60606 kboyle@mpslaw.com (312) 987-9900

Protecting Rights and Obligations, Minimizing Risk for Developers, Retailers and Other Project Constituents

• III. Common Pitfalls with REAs
• IV. Amending Existing REAs

• 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

• 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

• utparcels.

43

• 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

SHOPPING CENTER AND OUTPARCELS

45

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

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 “non-

retail” uses to 5% or 10% of shopping center.

47

• C. Anticipate Different Uses
• r 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

• C. Anticipate Different Uses (cont’d)
• r 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

• C. Anticipate Different Uses (cont’d)
• r 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

• C. Anticipate Different Uses (cont’d)
• r 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
• bligations
• Example: REA with shared access road for multi-

family and single family developments. Costs are allocated among all “Dwellings”. What happens if

• ne parcel becomes retail shopping center?

51

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

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

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

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

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

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

• 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

• 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

• 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
• f REA.
• Unrecorded Supplemental Agreements or Approved

Letters.

• Obtain approvals one REA party at a time.

60

• 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
• nly?
• Impact of mixed use – again, only common

elements?

61

• 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

• 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

OFFICE USE

64

• 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

• 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

• 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

• 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

• 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

• 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

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

Schaumburg Office 1515 E. Woodfield Road, Second Floor Schaumburg, Illinois 60173 Tel 847-330-2400 Chicago Office 300 South Wacker Drive, Suite 2300 Chicago, Illinois 60606 Tel 312-987-9900