If only real estate lawyers had drafted the U.S. Constitution, it would have been done right. After all, the Constitution is really a glorified set of covenants, conditions and restrictions ("CC&RS") much like a grand reciprocal easement agreement, layered in over a very large mixed-use project.
Both the Constitution and CC&Rs reflect a centralized governing form that is designed to combine individual components into a superior whole — in one case to set the order for federal and state spheres of cooperation and in the other to resolve the issues of distributing complementary land, services and rights throughout a mixed-use project. The artistry is to balance the degree to which the main ruling body has a say over what happens within the component condominiums or other real estate elements.
If drafted properly, they "form a more perfect union, establish justice, ensure domestic tranquility....," and thus, the various components will complement and enhance each other, and the sum of the parts will exceed the whole. If not, then the opposite is unfortunately true — the whole will become less than the sum of the parts.
Consider some of the themes that the typical CC&Rs structure shares with the Constitution. There are rules for what happens within shared common areas and facilities, and what can and cannot be done within a condominium unit. The idea is to create a balance between freedom to own and use one's property in a manner one desires, and yet to do so in a manner that does not interfere with another's use and enjoyment of such other's own property. Similarly, the overall idea in the Constitution was to strike a balance between addressing the common areas of our nation (e.g., commerce clause, treaties with foreign governments, and so forth) and the degree of power to be given to a central governing body versus state rights (e.g., the 10th Amendment).
The Constitution is the culmination of a lot of give and take among the framers, principally around just how much power to give to a central government, the independence of State rights, how to allocate power among the States, and how to permit change through a prescribed process. Similar considerations are involved in designing a workable set of CC&Rs. Moreover, lawyers who have had to negotiate CC&Rs among various neighboring owners who were not obliged to participate in such an agreement can sympathize with those who negotiated the Articles of Confederation in 1781.
Dealing with controversy is also common to constitutional issues and to CC&Rs. Many who have lived in a condominium or co-op building have some understanding of what it is like to deal with controversy in the context of homeowners' associations (i.e., the central government) and rules and regulations with which you may disagree.
But of course, there are significant differences between CC&Rs for a commercial project development and the Constitution. Fortunately, unlike our Constitution, most mixed-use real estate projects are conceived as a whole from the beginning by a single developer with a single purpose — to allocate common resources and risks in a manner that create a synergistic environment. If done properly, the mixes of uses contribute to each other to make them better than if they stood alone. Well drafted CC&Rs create value supporting the positive mix and allocate resources in a manner that is beneficial to all stakeholders.
The alchemy among parties to CC&Rs must make sense. A supermarket with tight parking next to a large gym can leave customers of both uses quite frustrated, reducing the value of both uses. The same is especially true in hotel-enhanced mixed-use projects, where developers can face the more complex task of creating and merging uses in a complementary manner.
Those who practice in the hospitality industry understand that the right hotel can increase the value of other project components. For example, a luxury hotel can increase the value and pricing of branded condominiums. Or, adding the right hotel to a mixed-use project with a shopping center and retail can enhance both the hotel's and the adjoining retail outlets' profits. Travel surveys consistently show that one of the favorite activities for travelers is shopping while they travel, and a hotel brings a daily flow of out-of-area credit cards to retail stores in a project. This is one of the reasons we often see large retail mall owners focusing on hotels within or near their mall properties.
Finding the right mix of amenities and entertainment options will increase hotel brand awareness and provide unique experiences that guests would be unable to get at other hotels.
It is incumbent on the hotel developer to create complementary mixes, rights and cost allocations. Evidence of such mixes are in a number of higher-end hotel projects which include signature restaurants, event spaces and resort-style spa and workout facilities.
Another purpose of CC&Rs is to delineate what the various parties occupying a master project can and cannot do, who owns what and who must pay for what. Best to get this clear up front. As an example, a single project tower building can have several purposes: hotel, residential, office and parking. In the CC&Rs, those using the offices, residential and hotel space may want separate accesses, lobbies, elevators and parking areas. One or all of such uses may or may not need valet services.
Given the differences of use intensities, the developer will need to create separate cost centers which should be reflected in the CC&Rs. For example, the hotel and restaurant facilities will require greater trash and utilities uses than office users. The bars and clubs within a mixed-use project may need greater security and noise reduction facilities, the cost of which should be properly allocated. The CC&Rs may address such cost centers directly or refer to a process by which such cost centers can be adjusted annually, depending upon changing circumstances. The more streamlined and rational the resolution process, the more valuable the project.
CC&Rs written today need greater flexibility than those of the past. Significant changes in environmental, utilities, transportation, governmentally required upgrades, and public tastes will continue to advance. More thought must be given to parking facilities, electric and autonomous vehicles, loading docks, sidewalk areas, elevators and human moving facilities, robotics, artificial intelligence, information and communication systems, privacy concerns and the health and safety of guests and visitors, and the insurance programs that will be necessary to allocate risk properly.
Enduring CC&Rs need a tremendous amount of flexibility, but they must continue to regulate competing elements of the project in a way that will continue to enhance and improve the synergy among the project uses. Failure to implement a flexible but workable system that can be adjusted from time to time to address complementary and incompatible amenities and resources will have a significantly adverse impact on a project.
CC&Rs of the past were much more rigid with tight use and architectural controls, and autocratic associations. Often, any 'material change' in uses or designs might have to be approved by the architectural committee or a major user. CC&Rs today need both a certain amount of flexibility and the ability to resolve differences in an expedited manner. Not all technological, social and political changes can be anticipated, and there will be plenty.
Today, there are many older CC&Rs that no longer fit commercially. They may not have anticipated certain products becoming legal, such as cannabis, ride sharing or robotic services. What is a 'first class' use today may not be so tomorrow and vice versa. The exclusive use rights that can be built into CC&Rs can become easily outdated. The ability to address new building materials, designs, uses, common areas' costs and allocations, and so forth, will need to be weaved into CC&Rs, so that projects can continue to serve their customers and compete against new projects. There will need to be built in considerations for making necessary adjustments to address technological, cultural and anthropologic changes.
There are means by which the Constitution can be amended consensually by its stakeholders, or as sometimes happens, the Supreme Court will infer rights into the Constitution. The same holds true with CC&Rs. However, in either case, refinements and changes can be costly and take a long time to resolve. It is far better to get things right the first time.
In summary, today, developers must carefully measure and thoughtfully draft CC&Rs before they are set in stone. A properly drafted set of CC&Rs will anticipate change, create synergistic value and permit appropriate adjustments and flexibility without having to negotiate with all stakeholders. No set of CC&Rs can predict the future. But well drafted CC&Rs should anticipate change, require that stakeholders complement each other, and provide for reasonable and expeditions means for allocating resources and resolving disputes as they arise.
Originally published by Reuters Legal News and Westlaw Today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
