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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
Al Tamimi & Company Hospitality Practice• The only law firm in the region with a hospitality practice
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ACCOLADES
Jeremy ScottSenior Associate, [email protected]
Lada ShelkovnikovaSenior Associate, [email protected]
Tara MarlowPartner, Property &Regional Head of [email protected]
KEY CONTACTS
