Investing in the Maldives
Investing in Tourism
Mergers & Acquisitions
The Maldives being one of the highly investible countries in the tourism sector, there are various acquisition options available for investors interested in developing/operating a tourism brand in the Maldives.
Since ownership of land in the Maldives is restricted to foreign nationals and corporations, long term leases upto 99 years (with 100% foreign ownership of the leasehold rights) are available for the lease of tourism lands, islands and lagoons – in essence providing the same effect of ownership.
Direct acquisition of leasehold interest of a greenfield or a lagoon from the Government of Maldives (Ministry of Tourism), after payment of an acquisition fee set by the Ministry, is a prospective way forward for an investor looking to develop/construct its own brand from scratch.
For those investors interested in acquiring an already operational property, the option for acquisition of the head lease from an existing leaseholder or acquisition of a sublease from the head leaseholder is an option with a willing seller. International hotel management chains have the option to acquire the management rights of a property from an existing manager or on a vacant possession basis in negotiations with the resort operator.
Greenfields and Lagoons
Greenfields, also referred to as virgin islands, and lagoons in the Maldives can be acquired for the development of tourism via two methods.
- First method is to acquire the lease from the Government on public tender. The islands and lagoons available for tender are published by the Ministry of Tourism on an annual basis and the list is subject to regular revision by the Ministry.
- Second method is to acquire the head lease to an island or lagoon without any material developments. This would mean that there has to be an existing head leaseholder willing to sell the head leasehold rights.
Operational Resorts & Hotels
Acquisition of operational properties is in itself a process. Unlike greenfield and lagoons, acquisition of operational properties entail a detailed acquisition transaction alike typical M&A transactions in other jurisdictions.
Whether it is the head lease, sublease or the management that is being acquired, a close study of all the existing arrangements and rights in relation to the property need to be looked into during the acquisition process. Acquisitions in this regard are made pursuant to the transfer of shares of the leaseholding company or by transfer of the lease in accordance with a rights transfer regulation (the ‘Grant of Rights Regulation’ (Regulation Number 2010/R-14) prescribed by the Ministry of Tourism.
Sublease and Management
Sublease and management of resorts are acquired on commercially agreeable terms between the operator of the island/resort and the interested party. Even though the terms of sublease and management are commercially negotiated this is also an area which is fairly regulated by the Ministry of Tourism. For instance, granting sublease or management rights can only be carried out after the approval from the Ministry of Tourism. The Ministry of Tourism has also set specific requirements for any such approval that needs to be abided by in the draft Sublease or Hotel Management Agreement.
As for common arrangements for sublease and management of resorts, they are either granted on a fixed rent/fee basis or with a mixture of base fee (which would normally be a certain percentage of revenue) and an incentive fee. Additionally, the liability of the head leaseholder to pay land rent to the Government is also negotiated to be included as part of the sublease rent in some instances.
Furthermore, provisions for hiring employees and furniture, fixtures and equipment (‘FF&E’) funds are negotiated. Under sublease agreements, employees are employed under the name of the sublessee, however, under hotel management agreements all the employees and FF&E and plants are provided by the leaseholder. Regardless, it is a common arrangement that the manager undertake expenses on behalf of the leaseholder and subsequently claim for reimbursement of those expenses from the leaseholder.
As for the period/term for which the sublease or management is normally granted, it is common to see, when given for management, the term is for a minimum number of years (such as 5 or 10 years) with option for renewal. Whereas in cases of sublease, it is often the case that the sublease is given out for the remainder of the head lease term – such that it does not exceed the head lease term. The standard head lease term is 50 years with the option to extend by an additional 49 years (a total of 99 years) after fulfilling certain conditions.
Registration with the Ministry of Tourism
For both sublease and management arrangements, once the terms have been agreed and approval obtained from the Ministry of Tourism the agreements have to be registered at the Ministry of Tourism. Once the sublease or management is registered, neither the sublessee nor the manager has the option to further sublease or subdelegate the management rights to a third party. However, they still would have the option of assigning all of its sublease or management rights to another party (i.e., a sublease or management sale).
With various models to structure the sublease and management acquisitions, the final model to proceed with has to be decided by the incoming investors after careful consideration of financial projections and assessments carried out by professional financial advisory firms, asset managers or valuers.
Strata-Title Lease of Villas or Rooms in Resorts
For investors interested to invest in individual villas or rooms, strata properties would be an attractive investment. Several of the operating resorts in Maldives offer strata leases over villas or rooms.
A strata lease, in this context, refers to leasing out separately identified villas or rooms in the resort for an agreed number of years in a one-time transaction. Details such as description of the property, strata title purchase price, rights and obligations of the strata title owner and the resort operator over the strata property will be set out in a Strata Lease Agreement that is to be executed between the parties and subsequently registered with the Ministry of Tourism.
Normally, these types of strata properties are used by high net worth individuals as vacation homes for them to reside over specific times of an year. For the period the property is not personally utilized, arrangements are made with the resort operator to sell the villa/room to tourists on various types of profit-sharing arrangements. Since the strata property owner may not be resident in the Maldives to oversee the upkeep and maintenance of the property including overseeing the booking process for vacant periods, a separate Management Agreement will usually be entered with the resort operator for the management and operation of the strata property.
Specific requirements relating to strata leases, among other things mortgaging strata lease rights, right of access, insurance and non-interference in resort operation are specified in the Grant of Rights Regulation.
Options for Acquisition (M&A) Transactions
Asset or Business Acquisition?
Like most acquisitions, the options for acquiring a tourism lease is by either (i) acquisition of the asset holding company (i.e. share/stock acquisition) or (ii) acquisition of the business/asset itself.
If an asset acquisition is chosen, the related claims against the island and the resort (the property) will have to be checked during the due diligence stage and the acquisition has to be carried out through the Ministry of Tourism in accordance with the prescribed rules for lease transfers.
One advantage of the regulatory requirements put in place for asset acquisitions is that, in addition to the findings of a buyer due diligence, during the lease transfer process the Ministry of Tourism will publish an announcement for third parties to submit claims in relation to the property. This may in turn help to identify potential claims in relation to the property that did not surface during the buyer due diligence.
If share acquisition is chosen, it has to be carried in accordance with the rules for share transfers as per the relevant laws and regulations of the Ministry of Tourism and Ministry of Economic Development (the governing authority over companies).
In share/company acquisitions, there will be no lease transfer per se and no public announcements for third party claims will be made. One vital matter for consideration during a share/company acquisition is that undischarged obligations of the company (may it be tax or third party contractual obligations) might come up several years after the acquisition has been concluded.
Whichever option chosen there will be pros and cons, to weigh and make a decision. Hence, risk has to be allocated accordingly, during the sale and purchase agreement drafting stage, such that the buyer is secure to enforce remedies against the seller even after the sale process is completed in case of breach of representations and warranties.