structuring cc&rs for mixed-use projects: drafting, analyzing,...

Structuring CC&Rs for Mixed-Use Projects:

Drafting, Analyzing, Interpreting, and

Amending CC&R Declarations

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.

THURSDAY, FEBRUARY 4, 2021

Presenting a live 90-minute webinar with interactive Q&A

Kathleen D. Boyle, Counsel, Eversheds Sutherland, Chicago

Gretta C. Spendlove, Shareholder, Durham Jones & Pinegar, Salt Lake City

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-877-447-0294 and enter your Conference ID and PIN when prompted.

Otherwise, please send us a chat or e-mail [email protected] immediately

so we can address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the ‘Full Screen’ symbol located on the bottom

right of the slides. To exit full screen, press the Esc button.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 2.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the link to the PDF of the slides for today’s program, which is located

to the right of the slides, just above the Q&A box.

• The PDF will open a separate tab/window. Print the slides by clicking on the

printer icon.

FOR LIVE EVENT ONLY

Structuring CC&Rs for Mixed-Use

Projects: Drafting, Analyzing, Interpreting,

and Amending CC&R Declarations

I. Overview of CC&R Declarations

II. Drafting Effective CC&R Declarations

Gretta C. Spendlove

February 4, 2021

Mixed-use projects may combine commercial and residential uses, or several different

commercial uses. Examples:

▪ Office tower(s) and residential condominiums

▪ Office tower(s) and arts center

▪ Hotel(s) and expo center

▪ Any or all of the above, with parking

February 4, 2021 6

Overview of CC&R Declarations

Determine Structure of Mixed-Use Project

• Single structure with multiple integrated uses (e.g., one tower with retail at street level,

offices on higher floors, residential penthouse on top)

• Multiple structures over common podium or garage (e.g., underground parking garage with

shopping center and office tower on top)

• Multiple structures on separate lots sharing common areas or amenities in a unitary

development (e.g., several office buildings on separate lots with retail center)

February 4, 2021 7


Determine Structure of Mixed-Use Project (cont’d)

February 4, 2021 8



111 South Main / Eccles Center, Salt Lake City, Utah

February 4, 2021 9



Block 67, Salt Lake City, Utah

February 4, 2021 10



Valley Grove Commercial/Retail Project, Pleasant Grove, Utah

• Entities/Governance: Each component of the mixed-use development may have its own entity

and governing documents. Examples:

▪ One condominium for whole project, with different owners using parcels for various uses

▪ One subdivision for whole project, with different ownership entities within the subdivision

• State/Local Laws: Need to determine whether state/local laws will authorize air rights

condominiums or subdivisions, since mixed-use projects often have an air rights component.

February 4, 2021 11



Vertical Structures

• Subdivision or condominium

• If multiple units, attach parking to each

• Determine what relationship vertical

parcels will have to each other

February 4, 2021 12



• CC&Rs define uses of separate parcels (e.g., restaurant pads, parcels reserved for residences).

• Exclusive use clauses may prohibit any uses other than those specified.

• If one use depends on another, CC&Rs may include deadlines for development

(e.g., if developing office or hotel space is dependent on a restaurant, there may be

a deadline for constructing and opening the restaurant).

• Remedies for failure to develop may include buy-backs or monetary penalties.

• Force majeure clauses.

• Prohibited use clauses.

February 4, 2021 13

Drafting Effective CC&R Declarations

Uses

• Developers usually want broad declarant rights, including ability to make changes to CC&Rs.

• Often, but not always, declarant turns governance over to an owners organization (POA or HOA).

• CC&Rs determine when the turn-over takes place (e.g., when declarant no longer owns any

property in the project, or when it owns only a certain percentage of square footage).

• CC&Rs are recorded when the subdivision is approved or the project is initiated.

• In a multi-use project, there may be master CC&Rs for the whole project and then other

governance documents for individual parcels, such as a residence condominium.

February 4, 2021 14

Drafting Effective CC&Rs

Governance

One major function of CC&Rs is to establish rights of owners across each others’ properties.

• Temporary construction easements

• Access easements

• Landscaping easements

• Sign easements

• Landscaping easements

• Parking easements

• Storm drainage easements

• Utilities easements

• Procedure for designation of future easements

February 4, 2021 15


Easements

• Declarant manages maintenance of common areas, directly or through appointment of manager.

• Association (HOA or POA) manages maintenance of common areas, directly or through manager.

• In large developments, some maintenance may be delegated to sub-associations.

• Level of maintenance provided may vary by type of use (e.g., residential condominium may

provide more maintenance than commercial subdivision).

• As to particular items, CC&Rs must define which common elements, limited common elements,

and unit components are the responsibility of the association, the declarant, or sub-association,

and which are the owner’s responsibility.

February 4, 2021 16


Allocating Maintenance Responsibilities

• Building structural elements (association or owner?)

• Master association vs. sub-association

▪ Uniformity

▪ Economies of scale

▪ Control

• Special concerns

▪ Exterior facade

▪ Equipment and utility rooms (e.g., fire control systems)

▪ Roof, parking garage, loading dock, trash removal system

▪ Contiguous private roads and alleys

▪ Shared amenities

▪ Developer-owned amenities (e.g., golf course, marina)

February 4, 2021 17


Allocating Maintenance Responsibilities (cont’d)

• Can be fixed or variable

• Detailed analysis on every shared and separate use area

• Formulas for allocating expenses (common expenses and limited common expenses)

▪ Bases: (1) equal shares, (2) square footage (may vary by use), (3) assessed value, (4) land area,

(5) measured usage-metered, sub-metered, or physical count (e.g., loading dock use)

▪ Arbitrary allocation (e.g., 50-50 split)

February 4, 2021 18


Methods for Sharing Common Expenses

• Percentage based on land use/load factor in relation to other land uses; assign “points” or

“equivalent units”.

▪ Land points based on parcel size

▪ 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

• Special allocations based on user, certain uses, certain locations

February 4, 2021 19


Methods for Sharing Common Expenses (cont’d)

• Important issues for lenders

▪ Coverages

▪ Loss payee

▪ Right to use proceeds to pay mortgage versus rebuild

• Property insurance

▪ Who insures: master policy or owners’ policies

▪ Named insureds, additional named insureds, and loss payees

▪ What coverages do the association and owners need?

• Advantages of master policy

▪ Simplifies adjustment of losses

▪ Assures adequate coverage: 100% replacement cost or agreed amount

• Insurance shortfall and options to consider: special assessments versus loans▪ Mandatory rebuilding

▪ Partial mandatory rebuilding

▪ Repurchase rights

February 4, 2021 20


Insurance and Casualty

• Dispute resolution: mediation, binding arbitration

• Expansion or contraction

• Amendment

• Lenders’ rights

February 4, 2021 21


Other Issues

Make sure restrictions are adequate for current trends:

• Electric vehicle charging stations

• Drought-resistant landscaping and sprinkler systems

• Solar panels

• Modular and refabricated construction

• Home-based businesses

• Curbside management (e.g., Uber/Lyft pickup stations)

• Drones

February 4, 2021 22


Current Trends

• Be careful about definitions—provide definitions for major and frequently used terms, capitalize

them, and then reread document to make sure all definitions are used correctly.

• Proofread for cross-references.

• Use a form that has the proper slant (e.g., pro-association, pro-owner, pro-declarant).

• If you use provisions from different forms, be sure to standardize definitions and cross-references.

• Make and use an outline to ensure all important terms are included, and compare your document

to other CC&Rs.

• Review with client any special concerns, to ensure they are included.

• Ensure amendment provisions work, so parties can change provisions to fit circumstances

(e.g., unless required by statute or other considerations, allow amendments to be approved by

less than 100% of owners and lenders).

February 4, 2021 23


Drafting Tips

Thank you

Gretta C. Spendlove

Dentons Durham Jones Pinegar P.C.

111 South Main Street, Suite 2400

Salt Lake City, UT 84111

United States

1+ (801) 415-3000

Dentons is the world's largest law firm, delivering quality and value to clients around the globe. Dentons is a leader on the Acritas Global

Elite Brand Index, a BTI Client Service 30 Award winner and recognized by prominent business and legal publications for its innovations

in client service, including founding Nextlaw Enterprise, Dentons’ wholly owned subsidiary of innovation, advisory and technology

operating units. Dentons' polycentric approach, commitment to inclusion and diversity and world-class talent challenge the status quo to

advance client interests in the communities in which we live and work. www.dentons.com.

© 2020 Dentons. Dentons Durham Jones Pinegar P.C. is a member firm of Dentons. Dentons is a global legal practice providing client services worldwide through its member firms and affiliates. This publicat ion is not designed to provide legal advice and you should not take, or refrain from taking, action based on its content. Please see dentons.com for Legal Notices.

Month Day, Year 24

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP is part of a global legal practice, operating through various separate and distinct legal entities, under Eversheds Sutherland. For a full description of the structure and a list of offices, please visit www.eversheds-sutherland.com.

Drafting, Analyzing, Interpreting and Amending CC&Rs and Declarations

Structuring CC&Rs for Mixed-Use Projects

February 4, 2021

Kathleen Dempsey Boyle, Counsel

Eversheds Sutherland

III. Common Challenges and Pitfalls with Mixed-Use CC&Rs and Declarations

− Divergent Interests

− Enforcement

− Review and Approvals

− Litigation Issues

− Site Plan

− Signage, Height and Parking

IV. Amending Existing CC&Rs and Declarations

− Big Box/Anchor Tenant Guidance

− CAM – the mixed use conundrum

− Role of use restrictions for the long term

Agenda

26


Why tackle conversion to mixed use?

─ Do the different uses benefit from each other? Are they truly interdependent?

─ If not, sell off parcels or development rights to create a neighborhood rather than a mixed use project – common control or interaction not so important.

─ Conversion from retail to mixed use brings unique challenges:

• “Old” CCRs

• Control by one party (“Developer”) or certain owners, not a master association

• Large retail leases have long terms with their own use restrictions, control areas and co-tenancy requirements (minimum percent of project remains retail)

• Office and residential leases not so far-reaching

• Horizontal vs. vertical mixed use developments

27


Divergent interests among residential and commercial users and lenders and equity investors

─ Commercial owners (retail and office)

• Want to minimize interactions with residential users

• Not interested in operating association but still want control and flexibility

─ Residential users

• Want to minimize commercial impact – noise, traffic, trash, etc.

• Want stability to protect value of residences

─ Lenders and equity investors – don’t forget them!

• More underwriting scrutiny for mixed use due to complexity

• Reserves, maintenance, insurance – all practical matters

28


Enforcement by declarant or CC&R parties

─ CC&R Parties are often the only enforcers of the contract -Succession challenges

• If Declaration, the Declarant enforces

• CC&R party vs. “subject to” CC&Rs

• Successors may prefer to be only “subject to” CC&Rs

• Consider whether successors are likely to vigorously enforce CC&Rs

29


Enforcement – litigation issues

─ Consider the interplay between CC&Rs and leases for those asset classes with tradition of strong leases (retail, office)

─ Strong tenants rely on lease language requiring CC&R enforcement by landlord as CC&R party – sometimes even enforcing on landlord’s behalf

─ Legal actions may be brought under both lease and CC&R provisions

─ What is litigated? Violations of the “four corners” of the CC&R contract – direct contractual violations

─ Remedies may be equitable – injunction, TRO

─ Termination – not a remedy

30


Alternative dispute resolution

─ Why litigate operational disputes? May not be covered by text of the document. Example – budgets and allocations, not CC&Rs themselves

─ Consider expedited process for operational disputes, excluding document violations or collection actions

─ Resolution is the goal, not “winning”

1. Negotiation periods2. Mediation3. Arbitration – binding if allowed by law – litigation

avoidance depends on the state

─ Subject matter expert – engineer, not lawyer or judge

─ No discovery or litigation formalities

─ Limited right of appeal per state Uniform Arbitration Act

31


The site plan

─ What property is subject to the CC&Rs?

• Legal Descriptions - change over time

• Site Plans - give the road map – but what if missing or illegible after recording?

─ Is there more than one CC&R affecting the property in question?

• Is one CC&R a subset of another (perhaps in the same document)?

• Do the CC&Rs interact or are they separate sets of restrictions?

• Mixed use – layers

32


The site plan – consider the big picture

─ Consider options such as umbrella CC&Rs that focuses on access across entire property, then CC&R provisions (or sub-CC&Rs) that restrict height, access and uses on individual parcels. Why?

─ Focus on geography of property both internal and in relation to surroundings

─ Topography of site

─ Infrastructure and type of development surrounding site

─ Easements may not need to change even if use does

33


Any Center USA - converting retail to mixed use – or not

Site plan showing parcels

34


Restrictions applied to mixed use

Site plan showing parcels

35


Consider the future: anticipate different ownership of different parcels

─ Might some parcels be “peeled off” from main property?

• Possibly not subject to entire CC&Rs?

• See mini-REA in materials

• Subdivide – when?

─ 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?

─ Prepare for phasing

• Maintenance standards before development

• Consider compensation for original phases of work that benefit subsequent phases

• Accept that there will be fluctuations in market demand and/or financing issues

36


Allocation of common expenses

─ Use zones for larger projects

• Based on use classification – residential, office, hotel

• Based on geography – location in project

• Benefit of zones – reduces interaction!

─ “Pods” of shared facilities – equivalent to limited common elements for condos

• Loading docks, refinancing

• Preferred parking areas

─ Both are examples of “CAM Pools”

─ Consider linear feet allocation for outparcels

─ Consider intensity of use and benefit received – shared trash/recycling, parking, after-hours lighting

37


Challenges with CAM allocations

─ Difficult to determine what may be fair to all at the outset

─ Build in flexibility to change allocations or add or subtract cost categories

─ In the background – budgets and communication

─ Documents must not only be clear and thorough, but fair and perceived to be fair

─ Practicality and plain language rule

─ Consider unrecorded cost allocation agreements (see materials)

─ Difficult balance – interplay between leases and CAM, particularly for capital expenses

38


Retail – the bad old days? Mixed use and common sense

Signage

─ Exterior signage – pylon, monument, directional or on-building exterior signage. Users need right to signage in CCRs –but consider size and number.

─ Municipal ordinances control and limit CC&R signage negotiations. Prior approval of … whom?

─ Mixed use – focus on signage easements for installation and maintenance - maintenance of signs are common area expense or expense among sign users, while individual sign panels are the responsibility of the benefitted occupant.

─ For retail users, address signage details in leases rather than recorded CCRs – more flexibility.

39


Role of strong tenants that are not CCR parties anchors/big box tenants

─ Sometimes overreaching regarding control areas and restrictions, but….

─ Contractual obligations that expire when lease does

• Subject to existing exclusives and restrictions

• Control over access roads and view corridors

• How broad is impact of tenant’s restrictions on future development?

─ 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 CCRs or amendment

• Tie restriction to actual use, with automatic expiration

• Consider control areas rather than total frozen site plan

• Consider approval rights over limited geographic areas, like protected parking

40


Consider de-emphasizing use restrictions

─ Do use restrictions create unintended consequences long-term?

• Perhaps focus on the underlying issue – parking protections

• Aesthetics – discount stores –focus on harmonious exteriors

─ “Noxious” uses change over time

• Pet store – now potentially desirable national big box chains

• Food sales – “Not near my clothing store!”

• Now grocery stores fill anchor spaces

41


Challenges with Use Restrictions

CC&Rs and amendments

42


Flexibility in restrictions to adapt to change

─ Parking and traffic management: Electric vehicle charging stations, self-driving cars, valet parking, on-line package pick-up, carry-out, Uber/Lyft stations, public transportation lanes

─ Design: Access controls, solar panels (use of roofs), security

─ Challenges ten years away

43


Use and control of “public” spaces

─ Active space as an amenity for all – traffic generator for commercial uses and increases residential values (walkability and liveliness)

─ On-site programming controlled by developer, an association or commercial owners – with cost allocations through CC&Rs or budgets

─ Off-site programming using common areas (adjacent theaters, arenas, street festivals, block parties, farmers markets)

─ Becomes a “downtown” area: live-work-play

─ Downsides: parking regulations needed,security increased

─ Look to retail and design for best practices re: regulation of events and demonstrations

44


CCR amendments – approaches and strategies

─ Amend vs. amend and restate vs. unrecorded agreements.

• How extensive are needed changes?

➢ Confirm if prior CCRs should be terminated and superseded.

➢ Remove 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)

➢ Amend to remove violation in lieu of requiring consent?

─ 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 CCRs

─ Unrecorded Supplemental Agreements or Approval Letters

• Obtain approvals one CCR party at a time

• Avoids recalcitrant party until later time

45


CCR amendments – drafting tips

─ Think of use changes affecting cost sharing obligations

• Example: CCRs with shared access road for multi-family and single family developments. Costs are allocated among all “Dwellings”.

• What happens if one parcel becomes retail shopping center?

─ Perhaps amendment objective is met by creating sub-CCRs that address development on only a portion of the property

• Mini-CCR between a CCR party and a sub-parcel owner or operator passes on rights and obligations applicable to new sub-parcel

• Unrecorded cost sharing agreement addresses pass-through of overall CAM costs applicable to new sub-parcel

• See sample forms provided

46


Consider the long-term nature of the relationship

CCR amendments – drafting tips (cont’d)

─ Example of limiting interaction among different classes of users once basic parameters set in CCRs

• Low rise urban infill development – retail on first floor, office in some buildings, residential condos in mid-level buildings

➢ Condos share parking with retail/office in some parking decks – exclusive floors

➢ Retail owner maintains entire center

➢ Limited interaction but for CAM payments

47


Consider the long-term nature of the relationship

CC&R amendments – drafting tips (cont’d)

─ What happens if new owner is CC&R party but does not participate?

• Limit the topics subject to approval rights

• Deemed approval if no response

• Self-help and lien rights

─ Many shopping center CC&Rs have expired or are about to expire

─ Can the parties operate without CC&Rs?

• Some easements may be perpetual

• Convert to access, parking and utility easements and limited CC&Rs only, particularly if uses have changed?

• Use two party agreements or fewer than all parties?

48


Rely on municipal laws to shorten REA provisions?

CCR amendments – drafting tips (cont’d)

─ Municipalities more active – legal requirements may reduce need for private restrictions

─ Expect REA amendment review in connection with redevelopment

─ Use of municipal restrictions in REA amendment

• Sign provisions vs. municipal sign requirements

• Zoning - aesthetics

• Parking ratios

• Traffic management – offsite improvements

─ Trade-off between private control and legal requirements that might change

49


Conclusion

─ CCRs have regularly been in effect for shopping centers andmixed use developments for more than fifty years, so pastexperience will help serve as a guide for future CCRs asprojects develop and redevelop

─ For successful projects that stand the test of time, draftersmust work to keep a fair balance of the benefits andburdens among stakeholders over the term of the CCRs

50

Eversheds Sutherland 51

eversheds-sutherland.com2021 Eversheds Sutherland (US) LLP

Kathy BoyleCounsel+1 312 535 2624 [email protected]

Thank you for your participation!