How Project Covenants Ensure Mixed-Use Success

Andrew Much

Declarations of covenants, conditions and restrictions for mixed-use development projects (Project Covenants, often referred to as “Master Declarations” or “CC&Rs”) may not be the most exciting component of the project development process, but the failure to timely and properly complete them can profoundly impact the orderly development of new projects, as well as the ongoing control and evolution of existing projects. By following certain practical considerations, developers, their counsel and their development professionals can successfully utilize Project Covenants to advance their vision.

Timing

If at all possible, Project Covenants should be filed of record prior to the first property conveyance to an unrelated third party. Doing so will minimize the leverage that a purchaser or lessee of property within the project may have to complicate and potentially delay Project Covenant negotiations and/or extract concessions or modifications in exchange for their approval. Project site plans often continue to evolve, so a project developer, as the initial “declarant” under the Project Covenants, should have broad, unilateral authority to amend the Project Covenants to the fullest extent permitted by local law in order to take actions not materially affecting the existing property owner’s rights.

Easements

Project Covenants will typically describe easements required for development and operation of the subject project. Specific easement requirements depend upon the particulars of each project, but often include temporary construction, utility, slope, storm water, ingress and egress, recreational amenity, signage, and parking easements. Close coordination of easements between project developers, architects, engineers, attorneys and other project professionals is essential to ensure that the full complement of all required and potentially necessary easements are included within the Project Covenants and apply to the proper locations. In some instances where the easement may be difficult to legally describe or may be subject to relocation, it may be preferable to depict the easement area generally and reserve a right to refine the description at a later time.

Specifying Uses

Project Covenants should be closely reviewed to identify any prohibited uses appearing unrelated to the subject project to ensure they will not limit potentially intended uses. For example, prohibitions against “second-hand stores” could exclude designer resale shops. Project Covenants may also protect certain “exclusive uses” to protect specific owners, tenants or uses. Additionally, it may be necessary to preclude certain uses in portions of the project, such as eliminating alcoholic beverage sales near schools or churches or uses emitting loud noises (e.g., outdoor performance spaces) from areas near single-family residences.  Finally, Project Covenants will generally impose financial penalties for use or maintenance violations.

Common Areas

Project Covenants will ordinarily identify common areas within the larger project area, which may differ based upon the nature and scope of the project and the physical characteristics of the subject property, and may include private roadways, ride-share areas, parks, trails and pathways, landscaped and hardscaped areas, community farms and gardens, outdoor artwork, ponds, lakes,  access gates,  playgrounds,  or recreational facilities. The developer and its consultants should perform a cost-benefit analysis to determine whether certain common improvements should be dedicated to the municipality. Although doing so may potentially reduce operating costs/assessments, maintaining control over all or selected common areas ensures the spaces are maintained to the developer’s standards and enable the “activation” of such spaces.

Project Covenants for larger projects will often allow the declarant to temporarily close portions of common areas or private roadways for maintenance or special events. The developer may consider permitting the serving and consumption of alcoholic beverages within designated portions of common areas. Finally, some jurisdictions permit the open carry of firearms in public areas unless specifically restricted by the Project Covenants and/or signage. Evolving local regulations should be carefully reviewed.

Protecting Revenue Streams

There are a number of opportunities for creative developers to control revenue streams derived from the project, including the development of membership-controlled recreational facilities, advertising signage, sale of sponsorships, control of parking revenues or valet fees, concierge services, vending, revenues from special events, electrical vehicle charging facilities and cell tower rents.

Declarant Control and Governance

The time period a developer may exercise control as a declarant under the Project Declaration varies by jurisdiction. The maximum declarant control period may depend upon the number of landowners within the subject project or be limited to a specified term. Where such time periods apply, the declarant control period may continue for consecutive, automatically renewing terms. Typically, developers will retain declarant control until they sell their final lot or parcel within the project. Local counsel can assist in reviewing statutory time periods. If the project is governed by a mandatory membership association (ordinarily a nonprofit corporation), the developer should control the entity for the longest period by applicable law.

Design Control

Developers generally maintain design control throughout the project’s development to enhance property values and overall project quality. Larger projects with homeowners’ or property owners’ associations provide broad control rights in favor of the declarant, either directly or indirectly as the controlling member of an architectural or design review board or similar entity. The Project Covenants will typically include provisions outlining detailed requirements for design submittal and review for new construction and modification of existing improvements, and reference comprehensive guidelines prepared by design professionals and/or construction rules and regulation. The design review and approval process should provide detailed information regarding delivery requirements and timing and provide for dispute resolution and a mechanism for appeals in accordance with applicable legal requirements.

Assessments

Project Covenant assessment methodology is generally complicated and heavily depends upon the type of project, the scope of common areas and the amenities and other factors. A mandatory membership association’s fundamental purpose is to manage the operations of the project, requiring a reliable stream of assessment revenue, and an equitable allocation of assessments. Assessments often include a general assessment payable by each owner or tenant based upon their parcel size or their improved space, but assessments vary depending upon type or use of property or the location within a specific district of the larger project. Assessments may be collected in connection with sales and resales of parcels within the project or may be charged as fees to lessees. Project Covenants provide for enforcement mechanisms for failure to timely pay required assessments and charges.

Parking

Parking-related matters are complex and may be addressed in separate recorded agreements. Parking issues may include provisions delineating full- or part-time reserved spaces, access cards and other access-control technology, charges and validation provisions, valet facilities, management services, security and the right to ticket or tow, allocation of maintenance and capital repair and replacement costs.

Amendments and Modifications

Although the developer/declarant should be able to amend Project Covenants without prior approval from individual owners, tenants or users, approval is typically required where modifications may adversely impact the interests of third parties. The Project Covenants should also include provisions allowing for the annexation or withdrawal of a property in the event of a modification in project size. The developer may also impose supplemental building site or district covenants on specific portions of the project. Material modifications often require a super-majority vote of owners or tenants.

Andrew “Andy” L. Much is a partner in Arnall Golden Gregory LLP’s Real Estate practice and a member of the firm’s Hospitality, Office, Industrial & Warehouse, Retail, and Entertainment & Sports industry teams.