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Hospitality investments: A summary of the key legal issues that affect hotel deals
2007-01-30
There is certainly an appearance of ´heat´ in the activity reported around the hotel sector in the tourist hot spots of Thailand. Existing hotels are being bought out, new hotels are being built, resorts are being created with a hotel management structure and real estate residential developments are also in some instances adopting a hotel resort style concept.
The interested parties in such investment activity comprise hoteliers; investors; developers; consumers of real estate products within the hotels; hotel management branded chains to list only a few. Hotels can carry a unique set of legal issues which ought to be considered when investing in one unit or being involved in the buyout or sale of the hotel as a whole and a selected number of these issues are dealt with in this month’s article, the first of a two part series.
A hotel actually needs to be built or based upon land, so the first issue that needs to be thought through carefully is the investment and ownership structure and how Thai investors’ interests are apportioned and structured in relation to foreign investors’ interests. The restrictions on nominee shareholders must be adhered to and certainly foreign investors’ lawyers will be scrutinising a hotel structure carefully to ensure that adequate provisions are in place to ensure that one of the principal assets of the operation, land, is structured correctly.
A further consideration to be made at the outset of planning a hotel in Thailand is whether the design, size and location of the hotel is appropriate for application for Board of Investment status. Special approval from the Board of Investment can beneficially alter the structure of ownership as there are dispensations in respect of the foreign ownership restrictions on land in Thailand that can be obtained through Board of Investment status.
If there are a series of investors who wish to all have a stake in a hotel development, the future re-sale of their interest should be structured in a legal and tax efficient way. Limited Partnerships outside of the jurisdiction in which the hotel exists can assist with easy disposal of either a part of an interest in the hotel or the whole of it. The actual assets of the hotel can remain in their corporate structure if a disposable partnership exists which can be transferred without disrupting the corporate structure. Share Sales are typically easier to perform than asset sales, provided a careful tax analysis and due diligence process is conducted by the purchasers and their advisers.
In order to procure investment in a hotel, there may be a round of encouraging finance which should be supported by an investment memorandum document and a document to which the investors can subscribe and inject finance into the project with clear knowledge as to what the finances will be used for. Careful drafting of the investment memorandum is necessary to ensure that the investors are made aware of the issues that may be alien to them due to differences in the law between their place of domicile and the location of the investment. Certainly, hotels are regulated under different legal regimes throughout the world.
Due diligence on the land title of a hotel also requires larger thinking on the part of the advisers to the acquirer of the site if the hotel is to ‘be built’ or if the hotel is already built but refurbishments and a change of the site is planned. There may be parts of the site which will be typically larger than a villa investment that are unusable due to building restrictions, especially near beachfront areas. Beachfronts also present tricky legal issues such as land which comes into existence by virtue of land drift or accumulation of deposits resulting in extended beachfront.
Hoteliers and investors will be keen to use as much beachfront as possible and create a feeling of privacy for guests. However, beaches in Thailand are not private by their very nature and legal status so unless a beach is landlocked, hoteliers must exercise caution in relation to cordoning off a beachfront area and erecting physical boundaries. This can be overcome by appropriate planning and concept design of the hotel and regard to the effect of a hotel on the local neighbouring communities.
Access is of crucial significance to a hotel and therefore if there is more than one access route, this can be of value to the design of a hotel and also risk management. Additionally, during the period of construction, access should be protected from encroachers by warning signs and the erection of fences. Care should be taken that only private areas are cordoned off and where public utilities or other publicly owned items run through or near access of the hotel land, prevention of use by the public or absolute prevention of access by the public should be avoided. A combined survey and legal title search will provide clear details on access.
Investors may bring a wealth of expertise to a hotel development and that may be the very reason that they are involved if the co-ordinator of the hotel deal has selected investors carefully. If that is the case, then the expertise and how it will be injected into the planning, building and operation of the hotel should be documented and agreed at the outset to ensure that partners do not become silent at times when crucial input is required. A robust partnership agreement, setting out the areas in which input is required which could vary from construction project management to the actual financial operational use and management of the hotel post-launch should be mooted and discussed by the investors so the terms of investment are clear.
Timelines should also be crafted in any legal documentation to reflect realistic and achievable goals. The building and construction of a hotel is more expansive and challenging than a single dwelling unit and a delay may well be necessary to ensure that issues of quality don’t affect the star rating or market perception of the finished hotel product. Investors should be provided with timescales based around due diligence; the creation of architects plans and drawings for approval, the tender for contractors, the application for building consents, the timing for recruitment of GM and key staff or management company, and then the timing of the building of the hotel itself up until launch. Some of these deadlines may be fixed to give assurance to investors, but some by their very nature will not be capable of being fixed in time. A draftsperson must understand the mechanics of a hotel in order to contemplate documenting the same in a legal agreement.
Summary
Hotels pose a challenge not only to the builders and the operators, but also to the investors, planners and their advisers due to the heavyweight nature and often sophisticated analysis required to put in place a successful hotel operation scheme. From the very first day that the concept of a hotel is mooted between investors, there should be a clear action plan and legal documenting as to the processes and key milestones which need to be effected and achieved to reach a stage where investors are comfortable to inject funds, the hotel is planned properly and there is a stronger likelihood of either buyout of the hotel from the investors or strong revenue returns based on successful operational performance.
This article was co-written by Desmond Hughes (Partner) and Kris Limcharoen (Partner) based in the Phuke, and Bangkok offices of Belmont Limcharoen respectively and now with a new office in Koh Samui. www.BelmontLimcharoen.com
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