Navigating Through Laws, Regulations And Ordinances Impacting Resort Development

Saturday, April 1, 2006 - 01:00

Editor: How did you develop a specialty related to resort development?

Payne: I was educated initially as an urban planner. Real estate development has remained a constant interest as I established and developed my legal career. Ballard Spahr is a tremendous firm for any real estate practitioner and a great fit for me. The firm has both depth and breadth in existing practice areas within real estate. Moreover, it gives its attorneys freedom to develop new areas of expertise. Our resort and hotel group has approximately 15 attorneys in the Rocky Mountain region and the East Coast. We have a great handle on the industry since we frequently share ideas.

Before joining Ballard Spahr, I was a general counsel to a local Denver bank that specialized in construction loans and other secured financing. As my practice has expanded, I have become more of a developer counsel. Today, I handle general real estate matters, land use proceedings and negotiation, construction contracting, structuring of equity within development companies and the negotiation of loans and other debt instruments. I also work on the formation of subdivisions and condominium projects primarily in resort communities. As part of our resort and hotel group, I also specialize in emerging products, such as private residence clubs, hotel condominiums, and non-equity membership clubs for lodging, golf, and other amenities.

Our clients range from national publicly held hotel companies to local private developers as well as operators of hotels and other resort amenities.

Editor: What legal concerns arise when hotel and residential resort projects include golf, spa or marine amenities?

Payne: Advising a residential real estate developer requires an understanding of a wide range of federal, state, and local laws. For example, the Federal Interstate Land Sales Disclosure Act and Fair Housing Act should often be considered. Familiarity with state laws regulating the development of condominiums and common interest communities, as well as regulations related to subdivision developers and realtors, is a given. Real estate common law must also be understood as well as municipal ordinances related to zoning, subdivision, and local licensing issues.

Adding resort uses to the development requires close attention to the specific requirements of these communities. Usually the sites under construction have a long history of prior development attempts, and the communities have a strong sentiment on how the land should be developed.

Adding an amenities package - such as a golf course, a beach club, marina or spa - adds a commercial use element, which has at least two conflicting impacts. First, the formation documents for the condominium or subdivision must encourage the economic success of both residential and commercial owners. Second, all uses must be tempered so that each can prosper.

One particular balancing act relates to the shared use of community amenities. Depending on the relative strength of the amenities owners to the residential owners, access to an amenity (such as a golf course, spa, or beach club) may be guaranteed through an easement, promised through a contract, or licensed through a short term arrangement.

Questions arise about the financing of the amenities. Will they be paid through assessments or use fees? Who has the ability to set budgets for the costs and expenses? The issue of paying for amenities going forward needs to be balanced with changing needs over the property owner's lifetime. For example, the operator of a golf course often imposes dues for operations onto the home owners regardless of whether they use the facilities.

The addition of commercial uses adds to the list of laws to be considered, ranging from the Americans with Disabilities Act to the commercial owner's concerns with employment laws and immigration laws.

Often high-value locations attract brand-named operators that require trademark licensing to protect their intellectual property assets. In addition, very specialized service and employment contracts need to be negotiated with award-winning chefs for luxury restaurants or for fitness and lifestyle trainers who have a strong following. A new variety of local license requirements become important, not just for business operations and liquor sales, but also for any sports medicine, chiropractic or masseuse services that a spa might offer.

Liability and insurance are growing concerns for mixed use communities that offer consumers a vacation centered on recreational activities such as yachting, mountain biking, skiing, or golfing even though they have never trained for the activities.

Advertising recreational experiences along with the interior experiences leads to questions about the resort's property boundaries. Guided tour licenses and laws may affect the offer of such activities as kayak or river rafting, heliskiing or Jeep track trips.

Editor: Resort communities see an increasingly wide array of new types of properties and owners, from condominium hotels, to fractional co-ownership properties, to non-deeded membership clubs. Can these pieces fit together?

Payne: The wide variety of new products and users is being driven from two directions. First, municipalities want to encourage greater use of their properties and amenities. The prior approach to development - featuring vacation homes, largely unused throughout most of the year - did not create an economically viable community. Municipalities are looking now at different products for both ownership and use that revive and get the most out of their communities.

Second, hotel companies are seeing different types of products as a way of reducing their risk of having to rely solely on operating revenues from hotel guest stays. Along with skiing and golf operators, they also are looking to reduce some of the financing costs and overhead by selling off some of their property. New products also diversify a real estate developer's inventory through the offer of highly valued property at many different price points.

One example of those products is the condominium hotel, a term of art which means any of a wide variety of mixtures of residential condominium units with a commercial hotel unit. In the most extreme case, the two properties are the same. That is, during the owner's stay, it is a residential unit and, at other times, it is a hotel unit.

Fractional co-ownership products or deeded residence clubs are usually a structured form of tenancy-in-common interests of timeshare estates. Product costs can range from a few thousand dollars to over one million dollars per interest. Annual use rights can range from one week to a quarter of a year.

A non-deeded lodging club is a recent product that, in most cases, follows the golf membership model. For an up-front deposit or membership fee, the member receives the right to use any of the residential properties that are operated by the club throughout the world. In other cases, the model is similar to a real estate investment trust where buyers have the same rights to use club properties, but they actually receive shares in the company instead of the club membership.

Editor: What types of issues do you help your clients address in the early development and construction stages of a resort project?

Payne: The sophistication of the local government's planning departments will require a full impact analysis up front. Land use negotiations are critical. Frequently, the desired locations are part of planned areas or unit developments that have unique procedural requirements for getting approval. Sometimes they are subject to long-term subdivision improvement agreements that will require analysis of the impact of the project on utilities and other local services. Often the sites are located in environmentally sensitive areas with protected features such as slopes, rivers, wetlands, and beaches. Often the local communities have a strong interest in retaining an employee housing base.

The other area for early planning relates to construction contract negotiations. Part of local land use planning usually includes public improvement requirements as an ancillary part of the development. With respect to specific construction concerns, resort properties are usually found in tight locations that may have off-site staging and storage issues. Often negotiation is required for air space rights for crane operation or flyover rights.

Construction of resort properties demands hard and fast substantial completion deadlines. A developer that promises a New Years Eve party has no substitute for a late delivery date.

Construction of resort properties is expensive. Their difficult-to-reach locations impact the availability and cost of utilities, materials, and labor. Upfront cost planning and contingency planning is critical.

Editor: Where do you see the future path of resort development taking your career?

Payne: Resort communities are following the lead of shopping centers and other successful retail properties that focus on entertainment value. They have begun to realize that they have to constantly undergo renovation. At the same time as they reinvent themselves, they have to remain true to the elements that made them popular by word of mouth to begin with.

What this means from the legal practitioner's standpoint is that a successful resort development is no longer just about building the best places. It is about rebuilding them and making sure that the legal documents allow for the flexibility to remake and redevelop properties in the future. A large part of my job right now is working through the early attempts to develop these properties and to implement new structures for redevelopment in the future.

I also see my practice transitioning from a real estate focus to a corporate focus because consumers are becoming increasingly comfortable with ownership of vacation property in a corporate form. They are looking for more flexibility in property ownership rights. This trend leads to a variety of ways of transferring the property without needing to rely on the traditional forms of real estate tools. For example, there is growing interest in legal instruments for transferring membership and club interests.

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