What are Reciprocal Easement Agreements (REA) in CRE?

What is a REA?

Reciprocal Easement Agreements in commercial real estate are legal agreements that enable individually owned parcels to be assembled into one large contiguous property that is typically rezoned for a specified purpose or use.

For those new to the field of commercial real estate investing, REAs are a crucial aspect of commercial real estate development, enabling multiple property owners to work together to create a unified and functional property. REAs can be used between two or more property owners who want to jointly develop their respective properties, allowing for a more efficient and collaborative development process. These agreements often apply to key segments like retail, office, and mixed-use projects.

Benefits of Reciprocal Easement Agreements

• Ensures all parties have access to essential project elements like roads, parking lots, and common areas.
• Facilitates adherence to rules regarding signage, design, and maintenance.
• Helps maintain individual ownership while contributing to a unified project appearance.

For example, in a retail complex spanning 50 acres with five separate land parcels owned by different entities, REAs allow for seamless integration of infrastructure such as roads and parking lots across these parcels. This makes the property appear as if it is operated by a single entity, benefiting retail tenants and shoppers.

Christie Minshew Lewis, a partner at Moyer, Lewis & Patton in Houston, Texas, describes REAs as crucial documents that "set the boundaries of what can be required of the parties to the agreement." Lewis explains that these agreements support a cohesive commercial real estate (CRE) project by ensuring no party is required to concede more than what they expect from others, essentially meaning, "I'm not giving up anything that I'm not asking you to give up. I'm not precluding you from doing something on your property that I'm otherwise precluding myself from."

Lewis further emphasizes that REAs require landowners to consider their readiness "to either restrict their use or encumber their property," with the expectation of gaining some benefits in return. She sums up the essence of REAs as, "I'll give you this, if you give me that."

Seven Typical REA Terms for Commercial Real Estate

REAs generally lay out the covenants, conditions and restrictions for large development projects and govern what the parties to the agreement must do, be they developers, landlords, tenants/operators or some other entity. They contain provisions that address items such as:

1. Access.
2. Parking.
3. Common areas.
4. Maintenance, costs, insurance and taxes.
5. Architectural consistency.
6. Signage.
7. Amendments and terms.

These terms provide assurances to property owners that access to roads, parking lots, common areas and buildings will be available and not blocked by an overreaching neighbor, inhibiting their ability to operate their business. If an owner needs to temporarily occupy or monopolize a shared space, there are provisions in the REA that grant them access as long as proper notification is given and the proposed use is previously agreed to or considered reasonable.

For example, an owner or their tenant may need to use several parking spaces as a staging area for construction work. An REA might require them to request use of the space three months in advance, specify the dates and hours of construction and the types of vehicles or equipment that will traverse or operate in the space.

The agreements cover items beyond access and circulation, focusing on hours or operation, architectural compatibility, types of businesses allowed and/or excluded on the property and much more. The objective is to delineate for all parties what can and cannot be done on the property, how common areas will be managed and paid for and what should be done in case of a violation to the agreement.

1. Access: Reciprocal easement agreements generally specify the location of easements across parcels ensuring that all properties have access to driveways, walkways, parking lots and, of course, roads that allow entry and exit to and from the project. Each party should have the right to access another party's property so vehicles and pedestrians can reach the property and circulate on it.

2. Parking: REAs can set forth where customers, tenants and employees of each property or business can park their vehicles. They can list permitted and prohibited types of vehicles and the number of parking spaces allocated to each property or business.

3. Common areas: Apart from vehicular areas, other shared or common areas include parts of the property that are available for all tenants, customers and others to use, such as outdoor green spaces and seating areas. Lobbies, elevators, escalators and hallways are also common areas used by employees, visitors, customers, etc. to enter, exit and circulate throughout the building and/or property. Elements such as the locations, dimensions and allowed uses in these spaces are typically defined.

4. Maintenance, costs, insurance and taxes. REAs also outline responsibility for and costs related to maintaining common areas. These operating expenses are integral to determining a property's net operating income (NOI), a key figure used when calculating the cap rate, which assesses investment performance and property valuation. Given their impact on property valuation, the costs detailed in REAs can also be significant in the context of commercial real estate appraisals. To manage these expenses, particularly for large-scale projects that might require significant upfront costs, stakeholders might secure CRE loans to fund the investment needed for development and maintenance. A managing partner or landlord generally oversees the management of the communal spaces. Owners and/or tenants contribute to an overall maintenance fund generally based on how much land they own or space they occupy. Calculating the cap rate can provide insight into the potential return on investment for properties within an REA, making it essential to comprehend what this figure indicates in commercial real estate. For example, a landowner or tenant occupying 15% of the site might cover 15% of the overall maintenance budget. The fees collected pay for expenses such as upkeep, insurance premiums for common areas, trash removal, cleaning, and lighting. Property owners are typically required to pay taxes relating to their own property and some part of the taxes pertaining to common areas.

5. Architectural Consistency. The REA will typically stipulate which owners will pay for certain construction costs and call for each party to review and approve the design and construction plans put forth by fellow owners to ensure architectural compatibility across the project. REAs typically call for construction schedules to be mutually approved.

6. Signage: Considerations concerning signs are typical elements of REAs. They can stipulate the size, locations, lighting and materials used relative to signs and also provide access details for maintenance and repair.

7. Amendments and Terms: REAs include what parties to the agreement can and cannot do on the property, who they should contact in case there is a problem and the process they will navigate to resolve any issues. In some cases, the agreement can stipulate how to modify the REA, if necessary. Restrictive easement agreements may be effective in perpetuity, and thus “run with the land,” binding future owners. The REA also might have a more limited term, but they are usually operative for long periods of time. It is not impossible to change REAs with legal remedies like quieting the title, abandoning the easement or releasing the easement. However, these approaches are very complex, time consuming and expensive.

This article was updated on 6/28/2024