Common Area Maintenance Obligationsin Hospitality-Oriented Mixed Use Projects
June 2008
A key issue in any mixed use project is structuring the maintenance obligations for the common areas. In a typical condominiumized project, common area maintenance is handled by the owners’ association and the cost is a common area expense allocated among all of the unit owners. By their nature, mixed use projects involve stronger players with potentially divergent interests. Adding a hotel to the mix raises the ante as the hotel operator (i.e., the hotel “brand”) will typically require a higher level of maintenance and service than a typical business tenant.Branded residential condominiums further complicatethe situation as the visible common elements of theresidential branded condos must be maintained at thesame level as the hotel. As a result, many hoteloperators are unwilling to rely upon their remedies underthe condo documents; they want to control condominiumcommon area maintenance themselves. The mostcommon ways of giving the hotel operator the right tomaintain the common areas are addressed below:
1. The owners’ association engages the hotel operatorunder a management contract which puts responsibilityon the hotel operator to maintain the common areas.This option allows the hotel operator a direct andimmediate right to maintain the hotel and condominiumsat a consistent level and can also result in cost savings tothe hotel and the overall mixed-use project. The cost ofmaintaining the condo common areas is easily passedback through to the various owners through the owners’association. Unfortunately, this option has a majordrawback which can be a deal killer from the hotel
operators perspective. Section 3-105 of the UniformCondominium Act (which is the model which has beenadopted in most states) provides that any contractentered into before the condo owners control thecondominium association (i.e., while the developer
controls the association) is terminable. As a result, thehotel management company cannot be assured that thatit will be able to maintain those common elements for the
entire term of the hotel management contract.
2. One means of avoiding the issue raised by the UniformCondominium Act is granting the hotel owner a perpetualmaintenance easement right over the exterior skin andother visible common elements of the condominiumbuilding, and then having the hotel owner subcontractout the maintenance responsibilities to the hoteloperator. Section 3-105 covers contracts and leases, anddoes not appear to invalidate other legitimate propertyinterests. Particularly where the hotel and condominiumare vertically integrated (stacked), the granting of thisperpetual maintenance easement has a legitimatebusiness purpose — to preserve the integrity of thebuilding skin and common areas shared between thehotel and other uses.
3. Another approach to the maintenance issue is creatinga separate condominium unit under the mastercondominium declaration comprised of all the commonareas in the project. That separate unit is oftentimescalled a shared facilities unit or SFU. The SFU is ownedby the owner of the hotel and the maintenance of thatunit is handled by the hotel operator pursuant to thehotel management agreement. From a cost allocationperspective, the condominium declaration should allowthe owner of the SFU to allocate costs it incurs inmaintaining the common areas to the owners of the units (both the commercial units — hotel, retail, etc. — and theresidential condominium association) that are benefitedby those common areas. For example, if the elevatorsservice the hotel and the residential condominiumslocated on top of the hotel, but not a separate retail unitthat is located on the ground floor, the cost to maintainthe elevators should be borne by the hotel unit and theresidential condominium unit. The disadvantage of thisstructure is that it requires the creation of another unitunder the condominium declaration, significantlycomplicates the condominium map (to create the SFU,you will need to identify all the common areas that thehotel operator will maintain), and requires detailedaccounting of the costs incurred for allocation purposes.
As indicated above, there are several ways ofapproaching the common area maintenance obligationsin a mixed use project. Each scenario requires carefulanalysis of the allocation of costs and the identification ofcommon areas, and making sure that the hotel ownerand hotel operator, as well as the other commercial andresidential condominium unit owners, have a clearunderstanding of how these issues are resolved.
Bob Voelker is the head of the Munsch Hardt Hospitality,Condominium and Mixed Use Group. Over the last 3years, the Hospitality Group has worked with developerson the W Hollywood hotel and condominiums; W Dallashotel and condominiums; Hotel Palomar hotel andcondominiums in Dallas; Stoneleigh Hotel andcondominiums in Dallas; Centrum Tower office, retail andcondominiums in Dallas; Houston Pavillionscondominiums, office and retail; the So-Co Urban Lofts inDallas; and the Westin St. Maarten condo hotel in theNetherland Antilles.