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

Jeremy Scott Senior Associate, Property The Strata (JOP) Background to the Branded Residence Model

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?

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 Management Group Hotel Owner Serviced Apartment Owners Association Higher Owners Association Hotel Owner Serviced Apartment Owners 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 Shelkovnikova Senior Associate, Hospitality Importance Of Project Structuring: Operator’s & Developer’s Perspective

Key Players Developer/hotel owner/tenant Operator Investors Owners’ Association Building Management Group

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

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 PoolMandatoryOptional 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 controlCan 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 PoolMandatoryOptional 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 ModelProsContras Fixed rentDeveloper 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 profitCosts 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 Scott Senior Associate, Property Lada Shelkovnikova Senior Associate, Hospitality Tara Marlow Partner, Property & Regional Head of Hospitality KEY CONTACTS