Ms. Tanzer and Ms. DuBois are based in our Ft Lauderdale office.

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 Fundamental Concepts

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:

  1. Real Estate Ownership

    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.
  2. Condominium Or Strata Title Regimes

    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.
  3. Restrictions On Managers

    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.
  4. Restrictions On Agreements

    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

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.

www.hklaw.com

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.