Taking certain risks is standard operating procedure for
developers and managers of resort, residential and mixed-use
projects. In today's global economy, with opportunities
withering in the Western Hemisphere, developers and managers are
weighing the risks, reaching abroad and expanding their operations
eastward to Asia. General George S. Patton advised: "Take calculated
risks. That is quite different from being rash." A
"calculated risk" is one that can be identified,
carefully considered and, preferably, mitigated. Identifying and
mitigating the risks of developing hospitality projects in a
familiar environment is challenging enough – doing so in
a foreign venue, such as Asia, poses additional challenges that
require specialized background, training, experience and most
importantly, creativity. The key to establishing calculated risks is to know enough to
ask the right questions from the right advisor. Competent local
counsel can provide valuable information regarding local law.
However, it is crucial for Western developers and managers, or
their advisors, to understand fundamental concepts of development
and management in the specific jurisdiction where the project is to
be located and how these concepts impact their typical business
model. Absent such understanding, indispensable information that
must come from local counsel may not be obtained. This
"information gap" could ultimately risk the success of
the entire project. The fundamental concepts include: (1) Real Estate Ownership; (2)
Condominium or Strata Title Regimes; (3) Restrictions on Managers;
and (4) Restrictions on Agreements. The following is a discussion
of each concept: The concepts discussed in this article are just a few of the
most fundamental concepts that create risks in resort development
in Asia. Many more risks exist which must be identified and once
identified, they must be evaluated and mitigated with creative
solutions. Unfortunately, creative solutions will not be found in a
fortune cookie. Rather, look to attorneys with experience in the
intricacies of project development in a variety of jurisdictions
throughout the east and the west, and an understanding from the
perspective of the developer as well as the manager. Such
experience will provide the framework necessary to effectively
mitigate the risks. The first instinct when expanding to a foreign
country could be to hire only local counsel. However, regardless of
time zone differences and distance across the ocean, the ideal
approach is to create a team of highly experienced legal
professionals who can assist from the United States along with the
local professionals. Understanding the concepts and assembling the
right team will transport you beyond rash decisions and deliver you
into the land of calculated and prudently managed risks. Holland & Knight lawyers have worked with a variety of
developers and managers to help them identify and mitigate risks in
connection with developments in multiple continents around the
world, including Asia. The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
The Fundamental Concepts
The first concept to understand is whether an individual
or a private entity can hold fee simple ownership of a real
property in the given jurisdiction. Not all countries allow such
fee simple ownership. For example, private parties are not allowed
to obtain fee simple title to any real property in China and
Vietnam. In these venues, private parties may only obtain the use
rights of the real property for a set period of time depending on
the nature of the use and the specific location of the real
property. For hotel or resort development in China, the right to
use may only be granted for a term of up to 40 years. For
residential development in China, the right to use may be granted
for a term of up to 70 years. In other countries such as Thailand,
fee simple ownership of real property is allowed but there are
specific limitations relating to ownership by foreign purchasers.
For example, in Thailand, only 49 percent of the total area of the
residences within a condominium project may be owned by non-Thai
purchasers.
This concept is particularly important to a developer who desires
to "sell" the ownership of the residences to third-party
foreign individuals or entities. If the residential project is
located in a venue such as China, both the developer and the
management company have the risk of being sued by purchasers who,
notwithstanding appropriate disclosures, incorrectly assume that
their million dollar purchase was for fee simple ownership rather
than for a right to use with a limited duration. For a residential
project located in a venue such as Thailand, it would be the burden
of the developer and the management company, as the manager of the
association entity, to ensure that the limit on foreign owners is
not violated with respect to each initial and subsequent sale of
the residences. Concepts of ownership also partly govern the
duration of the management agreements. For example, the duration of
a hotel management agreement for a resort project in China should
not be longer than the duration of the right to use of the
underlying land granted by the government which is, in most cases,
40 years.
The second concept to understand is whether a statutory
condominium or strata title framework exists and whether it will be
applicable to the particular structure of the residential project.
In the U.S., we take it for granted that there are condominium or
homeowner association statutes which require, among other things,
an association to be formed in connection with a development to
manage and maintain such development's common property. The
statutes also provide guidelines for certain governing documents.
Such governing documents can be recorded in the public records in
the county where the project is located and thus bind all owners of
property in the project, including all subsequent owners. In Asia,
many countries do not have similar statutes and public recording
systems, and even where they do, such statutes may not apply to the
specific residential product being offered depending upon the
various unique structures that may be implemented. For example, the
Condominium Act of Thailand (1999) may not apply if the
developer's intent is to sell long-term leases of residential
units in a mixed-use development in Thailand.
Understanding these concepts will determine what types of governing
structures are available to the developer. For example, will the
developer be creating a statutorily-based condominium or some other
system of governance? Will covenants such as assessment obligations
be established by operation of law or do they need to be carefully
crafted contractual undertakings? Only after this step is completed
can the governing documents be prepared to appropriately establish
the structure and to protect the parties involved from the risks
inherent in real estate development and management. Managers should
be particularly concerned about the structure and content of these
governing documents, especially in a situation where the developer
will "disappear" after all residences are sold. At this
point, the manager may be left to deal only with the association or
other corporate body formed to take the place of an association.
Without proper planning and preparation of such documents, the
manager could be exposed to numerous risks such as lacking the
funding necessary to manage the residential project to its brand
standards or lacking the authority to bind the subsequent
purchasers of the residences to the rules and regulations contained
within the governing documents.
The third concept to understand is whether there are
statutory restrictions which could create obstacles for the manager
to brand and manage resorts or obstacles to terminate such
responsibilities, if necessary. Certain countries in Asia, such as
Vietnam and Malaysia, impose strict licensing and qualification
requirements on property managers. In fact, in Malaysia, a manager
must be a citizen or permanent resident of Malaysia. In addition,
there are also restrictions in local laws which prohibit management
companies from removing their brands from the property upon the
termination of the licensing and management agreements.
The existence of either of these restrictions creates significant
obstacles and risks to the managers. The primary line of defense to
protect the managers' brands is the ability to terminate
agreements and immediately remove their brands from the projects
that are causing harm to the manager's reputation or brand
image. Without the ability to do so, the manager would be as
exposed as a turtle without its shell. It is important to
understand this issue at the earliest possible stage because of its
potential impact on the manager's strategy and approach to the
entire structure of the transaction.
The fourth concept to understand is whether there are
statutorily-required forms of documents that developers and
managers must use in connection with the development, sales and
management of the project. In many Asian countries, developers of
residential projects are required by law to utilize specific forms
that are mandated by the government in the sale of the residences.
Any variation to these forms must be pre-approved by the applicable
governmental agency, which is generally not easily obtained.
Developers and managers alike depend on critical disclosures
contained within the purchase and sale agreement and other customer
agreements to protect them from potential risks of liability in
connection with the development and sales of the residential
project. Any prohibition or limitation of such disclaimers and
disclosures to be inserted in the required forms of agreements
would create exposure to the exact risks that these statements are
designed to prevent.Conclusion