October 2015 Serviced Apartments as an Investment Vehicle: Legal and Regulatory Perspective

October 2015

Serviced Apartments as an Investment Vehicle: Legal and Regulatory Perspective

Jeremy ScottSenior Associate, Property

The Strata (JOP) Background to the Branded Residence Model

Introduction1. Creating Value through planning and optimal titling

2. The Legal Structures – management of the common/shared

areas

3. The Documentation – disclosure and control

4. Dubai and Owners’ Associations – Is compliance important?

Creating value through planning and optimal titling

• Determining the relevant title boundaries/components

• Mapping the rights and obligations in relation to

shared areas

• Installing metering and user pays mechanisms

The Strata (JOP) Background to the

Branded Residence Model

Serviced Apartments Only

The Legal Structures – Management of the Common/Shared Areas

The Strata (JOP) Background to the

Branded Residence Model

Building Manageme

ntGroup

HotelOwner

Serviced Apartmen

tOwners

Association

Higher Owners

Association

HotelOwner

Serviced Apartmen

tOwners

Association

Deciding which is right:

• Level of integration of the Components

• Preference - planning all eventualities or leaving the outcome to a process.

Simple Scheme – 1 Owners Association

3

1 2

The Documentation – disclosure and control

• The SPA

• The Jointly Owned Property Declaration

• The Building Management Statement or

Principal JOPD

• Long term OA management and FM

management agreements?

• The Lease-Back

The Strata (JOP) Background to the

Branded Residence Model

Dubai and Owners’ Associations – Is compliance important?

1. The basics – freehold title with the OA to be

responsible for Common Areas

2. The importance of disclosure

3. Mandatory Rental Pool vs Optional Rental Pool –

the case of the Owner/Occupier

4. RERAs approach to Owners’ Associations

5. Audits and sinking fund obligations

The Strata (JOP) Background to the

Branded Residence Model

Lada ShelkovnikovaSenior Associate, Hospitality

Importance Of Project Structuring: Operator’s & Developer’s Perspective

Key PlayersDeveloper/

hotel owner/tenant

Operator

InvestorsOwners’ Association

Building Management

Group

Contractual Framework

Objectives of Contractual StructuringAlignment of [conflicting] interests of all parties: Operator, Developer and Investors;

Strengthening the saleability of the branded residences among potential Investors: transparency, equity and investment attractiveness; and

Ensuring integrity of rental pool, incentivising Investors to keep serviced apartments in rental pool.

Alignment of conflicting interests of key players

• Preservation of the Operator’s right to operate and manage the property

Conflicting Interests

• Multiple participants to the rental pool

• Preservation of serviced apartments in the rental

pool• Control over shared facilities (gym, SPA, pool etc)

• Sharing the cost of management and

maintenance• Protection of Operator’s brand

• Operator’s remuneration and distribution of profit,

budgeting

Alignment of conflicting interests of key players

Hotel & Serviced Apartments

Rental Pool Mandatory Optional

Control over leisure facilities

Maximum control if included in the Hotel title . The costs of maintenance apportioned through BMS

Maximum control if included in the Hotel title . Unit owners outside the rental pool pay either on “pay-per-use” basis or regardless of actual use as per BMS (risk of late or non-payment)

Operating and non-operating expense

Depends on the ROI model. May be deducted prior to profit distribution

Unit owners outside the rental pool do not cover any operating or non-operating expense

Maintenance of common areas

Cost and serviced charges are deducted prior to profit distribution

Risk of late or non-payment of costs and service charges for maintenance of common areas

Decision making at OA General Assembly

Maximum control Can be ensured only where Hotel and S.A. components are located in the same tower with one OA for the entire building

Serviced Apartments Only

Rental Pool Mandatory Optional

Control over leisure facilities

Control is exercised as long as the units are kept in the rental pool

Depends on the rental pool dimension. Unit owners outside the rental pool pay either on “pay-per-use” basis or regardless of actual use (risk of late or non-payment)

Operating and non-operating expense

Depends on the ROI model. May be deducted prior to profit distribution

Unit owners outside the rental pool do not cover any operating or non-operating expense

Maintenance of common areas

Cost and serviced charges are deducted prior to profit distribution

Significant risk of late or non-payment of costs and service charges for maintenance of common areas

Decision making at OA General Assembly

Control is exercised as long as the units are kept in the rental pool

Depends on the rental pool dimension. Unit owners outside the rental pool vote at their own discretion

Return on Investment Models

ROI Models: Pros and Cons ROI Model Pros Contras

Fixed rent Developer benefits from upside return

Developer bears the downside risk (including shortfall in working capital). Financing of routine and major repairs, substitution and addition to FF&E – topical questions

% of profit Costs for maintenance of the common areas, operating and non-operating expense are deducted before profit distribution

Risk of late or non-payment of additional working capital and financing of major repairs in the Unit

Combination of both

Increases attractiveness of the project to private investors

Same as above

% of operating revenue

Increases attractiveness of the project to private investors

Developer bears the downside risk in case the revenue is insufficient to cover all operating and non-operating expenses

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ACCOLADES

Jeremy ScottSenior Associate, Propertyj.scott@tamimi.com

Lada ShelkovnikovaSenior Associate, Hospitalityl.shelkovnikova@tamimi.com

Tara MarlowPartner, Property &Regional Head of Hospitalityt.marlow@tamimi.com

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