Thinking about buying an island or remote resort?

Oct 30, 08 | 2:00 am

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By Robert Williams and Caroline Ho

After a relatively quiet 10 months in hotel and resort property deals, Baker & McKenzie's global hotels team is starting to see an upturn in activity.  Whether this new transaction flow reflects balance sheet driven disposals, or opportunistic buyers taking advantage of price reductions (or corrections), it is a certainty that buyers and their lenders operating in the hotel and resort industry will be more cautious in the way they conduct transactions.

But in this environment, buyers need to be able to seize opportunities as they present themselves, and the overly cautious or unprepared will miss out on deals.  Planning is essential in ensuring transaction execution is as efficient as possible, whilst still meeting relevant risk parameters and governance requirements. 

With that in mind, Baker & McKenzie's partners Robert Williams and Caroline Ho share some of their experience in acquiring assets at the more volatile end of the market: island and remotely located resorts.

Get on the ground

Many of the other topics discussed in this article feed back to this one - there is no substitute for being on the ground, from a commercial, legal (due diligence) and execution perspective.  Initially a buyer needs to get a feel for the resort, talk to staff, assess the facilities and capital expenditure requirements.  If the deal involves a development proposition, visit the site with the relevant consultants and meet with the local authorities to review any governmental criteria applicable to your project.  Once the deal gathers some momentum, the focus shifts to execution, and in many instances, the key stakeholders in any deal involving a remotely located resort will be spread across the globe.

As an example, on a recent deal involving an island resort in the Maldives, we had a Paris-based seller client, a Mauritian buyer, a BVI ownership structure, Sri Lankan and English financiers, and an Australian escrow agent to pick a few.  One strategy that drove that particular deal to closing was some very focused commercial and legal meetings on site at critical points in the transaction.  The willingness to get the key individuals together at the right time, and accomplish things face to face, helped the parties build goodwill and work through various issues together swiftly.

Consider teaming with a JV partner

Are you going to be more successful buying and operating your target property by yourself, or could you use some specialist expertise and/or local presence to good effect?  Especially in more exotic destinations, there can be cultural or political environments that local players are best placed to navigate.  Many owners take the view that having the right JV partner is key to this kind of deal, whether that partner is an international resort operator with unmatched presence in the relevant region, or a local property investor who can help ensure you pay prices that reflect the local rate.

Transparency and trust are essential parts of any business relationship, and you need to know who you are partnering with.  For many organisations, this will be one of the first steps in any deal approval process.  But recently we have seen a large international owner/operator get involved in a deal with a partner who ultimately did not have philosophies that were compatible with those of a listed international company.  This could have been avoided had it been identified at a very early stage in discussions and some discrete background checks been conducted.

Property rights

The fundamentals of real property rights in the relevant jurisdiction can be different to the ones you might be used to, and are invariably (whether due to imprecise regulation or practices, land right systems peculiar to that jurisdiction or structuring specific to the deal) not as clear as you or your lender will want them to be.  Whether it is a lease from a private owner, a government lease in the Maldives, or native rights in Australia or Fiji, it is essential to understand what kind of right and tenure you are buying. 

In addition, island and other remotely located properties have unique access, environmental/conservation and infrastructure challenges.  Some points to consider, and issues we have come across include:

• Title to the island - freehold, leasehold or right to occupy and use under a statute? If leasehold, is it a sublease and are there any restrictions in the head lease on your ability to operate or develop a resort, or to grant security?
• Is it possible to extend the lease term if capital investment is made by the buyer? Is there any right to renew and if so, on what terms? Who owns the improvements and is there any right to compensation for improvements at the end of the lease?
• Are there existing native rights or public rights to use or occupy the island, surrounding waters or beaches?
• What are the physical boundaries of the property?
• Accessibility - what are the by-air and by-water transportation arrangements/contracts? Are there any sea plane landing rights issues? Is there an ability (or even obligation) to operate your own transportation system? Do you need mooring or waterway rights?
• Environmental/conservation obligations - are owners obliged to maintain reefs, seabed or other protected areas? Are they required to support existing or planned academic research initiatives or maintain any accreditation?
• Insurances - what additional insurance is required other than the usual property and operational risk insurance? It is not unusual for island resorts to be located in what are perceived to be countries with high political risk or, due to their geographical setting, natural disaster risk. With these types of investments and particularly where financiers are involved, political risk and special property risk insurances are important. The terms of such policies can involve complex negotiations in their own right, and the premiums can be a significant operational expense.

Funding

Your existing finance providers may not be able, willing, or best placed to fund your acquisition.  If they do not have existing relationships and lending capacity in the jurisdiction you are looking at, you will need to factor their upskilling and security/collateral assessment procedures into your deal timetable and pricing.  That may not be practicable, and so it is worth seeking to identify financiers that are genuinely capable of providing the debt component for your deal at a very early stage.  Local or regional development banks are often involved in these deals: many have a mandate to support tourism businesses which in turn support local employment. 

It is not unusual to see a number of financiers involved in a deal to provide senior and mezzanine debt.  Each additional financier can raise the complexity of executing the deal exponentially, and inevitably additional time and expense is incurred in dealing with the requisite intercreditor documentation and lending conditions.

Even relatively straightforward banking arrangements can take much longer than expected to put in place.  For example, on a recent deal we were involved in, one of the parties needed to place a significant amount into escrow to meet a requirement of a government tender process, and quite understandably wanted to use a large banking institution as the escrow agent.  Despite having a long established and deep relationship with the U.S. and Hong Kong branches of one of the global financial institutions with a branch in the relevant country, around the clock efforts from advisors (both local and off-shore), and the use of every piece of leverage available, more than a week was needed to clear local government approvals and branch customer identification hurdles to open a bank account at the local branch.  It then took a further 10 days to finalize the escrow agreement as the deal was shuttled from the local branch to the regional hub, then up to the head office in London.  Needless to say, the cost of putting that escrow arrangement in place was not insubstantial.

Existing management arrangements and support

If the property has an existing resort, it is important to understand whether the owner has engaged a third party operator, and if so, whether the property can be sold with vacant possession or will remain subject to that operator's management rights.  Any relevant management agreement should be carefully reviewed as part of the due diligence process.

If the incumbent operator will be terminated on completion of your acquisition (which question is often not easily answered), are you confident that you, or your retained operator, can match the logistics support that the current operator delivers?  For remotely located resorts, the coverage and cost savings delivered by an operator with significant local or regional operations and experience (like Voyages in Queensland, Australia or InterContinental's four resorts in French Polynesia), can make a very real financial difference.

For some jurisdictions, engaging an operator with a well recognised brand and reputation may even be necessary in securing financing for your transaction.  The financier may require the operator to be locked into the management of the property, the converse of a non-disturb arrangement which most of us are more familiar with.

Government tenders

Governments in some of the world's more remote and exotic destinations are seeking to work with the tourism industry to help drive development, infrastructure, employment and ultimately GDP.  For some of these countries, tourism is their main revenue generator.  They are looking to investors to fund the development of islands, resorts and integrated tourism, residential and recreational facilities, usually in return for long term leasehold interests.  Some have opened this type of opportunity to the market and invited bids as part of a tender process.

Not all tender processes are as well developed, or are as precise, as investors might like.  We have seen tensions between government agencies and approximate tender terms frustrate progress.  A change of Attorney-General may put that particular deal back on track, but in other circumstances, changes in political circumstances could work against investors.  This is a good example of a situation where a well connected local JV partner could help steer you through the process, drive the outcomes and deliver the certainty that you need.

Tax and structuring

An acquisition of a property, or a company or trust that owns a property, in an off-shore location is likely to be more complicated from a taxation and structuring perspective than the acquisition of a CBD hotel next to your corporate HQ.  As the tax treatment of your investment will have a direct bearing on how much you can afford to pay for the relevant asset (and will sometimes allow you to bid a greater dollar price than a competing bidder who is not maximizing the efficiency of their structure) it is critical that appropriate tax advice is sought early so that you can set your pricing accordingly.

As part of the tax and financial analysis, you should consider how any profits made by your project (either income or capital on any exit) will be distributed.  Some jurisdictions, and Fiji is an example, have tight controls on how much currency can be moved at any one time, and investors should not assume they will be able to move funds quickly into or out of the country.

In addition, many jurisdictions do not allow locally registered companies to be 100% owned by people or entities that are not local residents.  There may be restrictions in relation to ownership of freehold or leasehold interests in land by foreign persons or certain tax or commercial benefits that are only available to local residents or companies.  Accordingly, your advisors will usually need to determine, if they do not already know, the most commonly utilized structure in the relevant jurisdiction (often a nominee), which will deliver compliance but more importantly will ensure effective control remains with the investor.

Approvals and permits

If you are investing in a location for the first time, in addition to the approvals and tax/legal structuring requirements mentioned elsewhere in this article, it is important to be aware of any relevant foreign investment rules (as well as the criteria, procedures and timing for approval), and the operational licenses needed to run a resort: alcohol/special foods, gaming etc and any special visas/permits for employees you may need to source from overseas.  These requirements should be picked up in the due diligence phase of your transaction, and applications should be made at an early stage to ensure that the process is not delayed down the track.

The mix of jurisdictions, tax and legal regimes that will usually be involved in an off-shore deal mean that advisors who are used to working across cultures and boundaries can deliver very real efficiencies.  There is also a need to project manage the advisory team and ask the right questions at the right time - this is a role we often perform for clients by liaising with our colleagues (in the 39 countries where Baker & McKenzie has offices) and our range of contacts in locations where we do not have a direct presence.  It is our experience that our global network of hotels lawyers can provide clients comprehensive and efficient advisory coverage on deals relating to locations or jurisdictions where the necessary depth of resourcing or know-how is not available locally.

About the Authors

Disclaimer

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