Real estate developers deal with many moving parts during the evolution of a new project. A primary component that can increase the desirability of a project is the construction of amenities for owners. Developers have learned to achieve economies of scale by allowing owners within one project access to amenities in an adjoining development. This is frequently done by using cost sharing or reciprocal use agreements between two or more entities. When drafting a reciprocal use or cost sharing agreement, best practices should be followed to ensure the agreement adequately protects each entity and results in a successful sharing arrangement.
A reciprocal use or cost sharing agreement must focus on the purpose of the agreement, the respective interests of each party, the scope of use, and the potential costs and liability at issue, among other factors. The end product should be a well-drafted contract that clearly documents the terms of the agreement.
Best practices to keep in mind when preparing a reciprocal use or cost sharing agreement include:
1. The Scope of the Shared Use
a. Clearly identify the amenities that are shared.
b. Specify the days and times the amenities are available to the parties.
2. Costs
a. Determine payment terms, requirements, late fees and penalties.
b. State which party has authority to administer the agreement including the making of repairs and contracting with vendors.
c. Confirm which party will interface with governmental agencies for permitting and compliance purposes.
3. Annual Budget
a. Require an annual budget at least 60 days in advance of the start of budget year with the proposed costs to be shared.
b. Prohibit long-term maintenance contracts that are greater than 3 years.
4. Record Keeping and Production Requirements
a. Require the administrator to maintain adequate records of actions and expenses.
b. Outline the process for cost overruns and unexpected maintenance expenses.
5. Annexation of Property
a. Address how cost sharing will be affected if additional property is added which will benefit from the amenities and reapportionment of expenses.
b. Determine the process for reallocation of costs in the event of an increase in use by one party.
6. Cost Sharing Terms
a. Ensure payment from each party is mandatory in full by a certain date so funds are available.
b. Prohibit diminution in payment or abatement of costs due to failure of maintenance or lack of use.
7. Facilities Committee
a. Establish an advisory group with representatives from each party to the agreement to facilitate communication and successful shared use.
8. Insurance/Indemnification by the Parties
a. Clearly identify the minimum coverage required under the contract.
b. Ensure indemnification by vendors covers all parties to the agreement.
9. Dispute Resolution Terms
a. Provide a mandatory dispute resolution process in an effort to avoid litigation.
b. Require good faith efforts by the parties to resolve disputes.
10. Basic Contract Provisions
a. Address the terms of the agreement and renewal requirements.
b. Set forth a process for amendment.
c. Include a severability clause.
d. Include standard contract “boilerplate” language
Cost sharing and reciprocal use agreements form the basis for many successful relationships and are commonly used by land developers and entities. Sharing of costs allows for economies of scale and consistent aesthetics. Similar agreements can also be utilized between special utility districts and entities to share the costs in newly developed projects. Examples include greenspaces, landscaping, parking areas, driveways, private streets and other amenities. Land owners real estate developers and other entities including property owner associations with questions on cost sharing or reciprocal use agreements should reach out to their legal counsel to determine if entering into one of these with another party fits their unique situation.
