Serviced Apartments as an Investment
Vehicle: Legal and Regulatory
Perspective
October 2015
The Strata (JOP) Background to the
Branded Residence Model
Jeremy Scott
Senior Associate, Property
Introduction
1.
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?
The Strata (JOP) Background to the
Branded Residence Model
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
Serviced
Apartments
Only
The Strata (JOP) Background to the
Branded Residence Model
The Legal Structures – Management of the Common/Shared Areas
Deciding which is right:
1
Building
Management
Group
Serviced
Apartment
Owners
Association
•
•
Hotel
Owner
3
Level of integration of
the Components
Preference - planning
all eventualities or
leaving the outcome to
a process.
Serviced
Apartment
Owners
Association
Simple Scheme – 1 Owners
Association
Higher
Owners
Association
2
Hotel
Owner
The Strata (JOP) Background to the
Branded Residence Model
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
Importance Of Project Structuring:
Operator’s & Developer’s Perspective
Lada Shelkovnikova
Senior Associate, Hospitality
Key Players
Developer/hotel
owner/tenant
Building
Management
Group
Owners’
Association
Operator
Investors
Contractual Framework
Objectives of Contractual Structuring
Alignment 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
Conflicting Interests
• Preservation of the Operator’s right to operate and
manage the property
• 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-peruse” basis or regardless of actual
use as per BMS (risk of late or nonpayment)
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 nonoperating 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-peruse” 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 nonoperating expense
Maintenance of
common areas
Cost and serviced charges are
deducted prior to profit distribution
Significant risk of late or nonpayment 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 nonoperating 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
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Staff
Partners
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ACCOLADES
KEY CONTACTS
Tara Marlow
Partner, Property &
Regional Head of Hospitality
t.marlow@tamimi.com
Lada Shelkovnikova
Jeremy Scott
Senior Associate, Hospitality
l.shelkovnikova@tamimi.com
Senior Associate, Property
j.scott@tamimi.com