Don’t Start the Carnival (Or Develop a Resort in the Caribbean Without Knowing the Full Story)
June 20, 2006
James M. "Jim" Norman- Ft Lauderdale
If you think the Queen’s Chain is a piece of jewelry Elizabeth II got from her favorite hip-hop star, you’re not ready to develop a resort in the Caribbean. In case you are curious, the Queen’s Chain, on islands colonized by France, is an area of coastal land adjacent to the beach lying between the mean high water mark and an upland line that remains in the ownership of the Crown. The primary purpose was the positioning of fortresses for the island’s defense. The specific area varies from country to country, but like beach front areas in the U.S., Queen’s Chain lands create title issues, development challenges, and are often the subject of long-term leases between the developer and the Office of the Commissioner of Crown Lands or a similar government agency.
Developing a resort in the Caribbean can be a profitable and rewarding pursuit in many respects. Some may remember the 1965 novel by Herman Wouk entitled “Don’t Stop the Carnival.” In this novel a stressed-out theatrical producer named Norman Paperman visits a resort hotel on the fictional island of Amerigo in the West Indies. He has a wonderful stay and decides to trade his brutally fast -paced life in Manhattan for what he believes is a life in paradise – running a resort hotel in the Caribbean. He quickly learns that his island fantasy is really a nightmare.
Money Is a Powerful Incentive
Caribbean governments like tourism. That’s not so much because they love to have hordes of foreigners running around their country, but rather for what the tourists bring – money! In most of the countries of the Caribbean, tourism drives the economy. Most importantly, tourism and hotels create jobs. Every Caribbean country is anxious to create as many jobs as possible, both temporary jobs, such as construction, and permanent jobs, such as resort staff. In addition, the governments are particularly anxious to create jobs in management, as opposed to pure service jobs. How do they go about encouraging the creation of jobs?
Most countries in the Caribbean have adopted legislation that provides incentives for the development of tourist facilities, and especially, hotels. On a country-by-country basis, they are known by a variety of names, including The Hotels Encouragement Act, Tourism Incentive Act, Hotel Aid Act, Tourism Development Incentives Law, Hotel Incentives Act and the Resort Cottages Act. The essence of these various laws is to provide a holiday experience for the developer. In this case, the holiday does not necessarily include rum and coke, but does provide a holiday from such things as taxes. The types of taxes that are waived for very extended periods of time include property taxes, import and customs duties, recording duties and various income taxes. Certain other kinds of taxes, such as business license taxes, are typically not waived.
If the incentives are embodied in statutes, is that all you need in order to have the benefit of available concessions? If only life were that simple.
The Deal Is in the Details
We like going to the Caribbean because it is relaxed, informal, warm and the locals are friendly. However, those attributes tend to work against the development process when negotiating specific concessions, primarily those which are beyond the scope of the legislation. Caribbean governments often will, through a series of relatively brief and non-detailed letters or other informal government actions, approve various elements of the project. Unfortunately, European and American investors and lenders prefer to see concessions granted in a more formal and bankable manner. Fortunately, there is presently a trend towards more formal and detailed agreements with respect to resort development.
These agreements are known by a variety of names, including Development and Concessions Agreement, and Heads of Agreement. These incentive and entitlement agreements will not only recognize that a particular project qualifies for certain statutory concessions, but may also significantly expand upon those concessions pursuant to authority resident in the Ministry of Tourism or the Prime Minister. It is important that sufficient due diligence be completed so that the scope of potential concessions can be learned and negotiated with respect to your project. One of the key elements of a project’s approval is the environmental impact assessment. Unlike the environmental studies that are performed for typical U.S. projects, Caribbean environmental impact assessments must not only deal with the environment, but also provide an analysis of social impacts. These social impacts refer to potential displacement of citizens, jobs and local business interests, including those in agriculture, such as banana farmers. The concessions agreements can also deal with areas such as density and the right to operate certain businesses. Where in the U.S. a number of jurisdictions would have to be involved in such approvals, in many Caribbean countries, all or most of these topics can be dealt with in a single, properly negotiated and documented agreement.
The Concessions Agreement Is Key
Local counsel is critical to the success of the negotiation and execution of a concessions agreement. It is important that local counsel be selected on the basis of both technical competence and their relationship with key government ministries and personnel. Like most things Caribbean, what is accomplished informally is often far more important than the official, formal process. Because of the relatively new emergence of formal concessions agreements, project counsel must remain heavily involved in the preparation of the agreements. This involvement will assure that sufficient detail and the concerns of non-Caribbean lenders and investors are properly addressed. The concessions agreement is only one part of the development of a resort project in the Caribbean. As a critical part of the development approval process, it is essential that the agreement be thorough and sufficiently detailed to avoid problems and conflicts in the future. Many other items will be of concern to the resort developer, including brand selection, whether to make the hotel a condominium hotel, and the proper mix of product types. Without the concessions agreement, however, there will be no project. It is a part of the development process that must, without fail, be done properly. If done well, it can certainly help make the Caribbean a developer’s paradise.
For more information, e-mail Jim Norman at jim.norman@hklaw.com or call toll free, 1-888-688-8500.