International tourism is growing faster than most other industry sectors in Australia. In the 12 months to last December, tourism brought in a record $41.3 billion.
In the state of Queensland, with its cosmopolitan cities, beautiful beaches, tropical islands, rugged outback locations, friendly country towns and five international airports located in Brisbane, Cairns, Sunshine Coast, Gold Coast and Townsville, there has been sustained growth in both domestic and international visitors and expenditure.
More than 24 million domestic and international visitors come to Queensland each year. Among these international arrivals, Chinese visitors are now Queensland’s largest and fastest growing inbound tourism market.
Responding to this strong trend, we have seen a steady growth in interest from both domestic and offshore investors in Queensland’s hotel and resort market. This article summarises some of the main legal issues for investors to consider when either acquiring an existing hotel or developing a new hotel.
Acquiring an existing hotel
- Hotel property and business: Investors need to acquire both the (i) hotel property; and (ii) the hotel-keeping business. Investors should treat these two items separately in valuation, due diligence and legal documentation.
- Acquiring structure: Investors can either (i) purchase all of the shares in the company which owns the hotel from the seller (assuming the hotel owner is a company) (Share Purchase); or (ii) purchase the hotel property and key (but not necessarily all) assets required for operation of the hotel business (Business/Asset Purchase). Business/Asset Purchases tend to be more popular because investors will not need to assume all of the owner company’s liabilities and obligations after the acquisition. However, investors should consider factors such as tax efficiency, asset protection, liability risk management and administrative capability when determining the acquisition structure.
- Due diligence: The purpose of due diligence is to identify material issues which pose legal risks to investors (as a future owner of the hotel). Investors should conduct due diligence on both the hotel property and associated business. Property due diligence should verify the seller’s or the target company’s title and investigate whether the property is subject to any third party interests. Business due diligence should cover areas that are important to operations, such as material agreements, financing arrangements, employment, regulatory requirements and intellectual property, so that investors understand their risks, obligations and rights. Due diligence also improves investors’ bargaining position in that it helps to identify issues/defects that the investor may wish for the seller to fix before the investor commits to the deal.
- Dealing with agents and brokers: Most offshore investors get to know Australian hotel investment opportunities through offshore and local property agents or brokers. Investors should be alert when being asked to sign an exclusivity agreement with agents and should consider the risks associated with dealing with multiple agents on a potential deal. As a first step, it is prudent for investors to verify an agent’s identity and authority to market and sell the property (and on what basis – exclusive or non-exclusive). This manages investors’ risk where multiple agents subsequently compete for commission on the sale of a single hotel property.
- Licences and permits: Most hotels have on-site kitchens, cafes and/or restaurants serving both food and alcohol. In Queensland, investors must make arrangements so that liquor licences, food business licences and trade waste approvals are put in place for the post-acquisition period.
Building a new hotel
- Property development: Most offshore investors building new hotels in Australia are experienced property developers in their home countries. Developing a hotel from scratch is complicated and has a long project cycle. Investors must first identify a suitable development site, construct buildings matching selected branding (if applicable) and hotel operation can only start after construction is completed. The major benefit of this approach is that it provides investors with a variety of exit options.
- Foreign Investment Review Board (FIRB): Investors may be required to notify and receive a no objection notification from FIRB (FIRB Approval) before acquiring an interest in land for the purposes of hotel development site selection. Different rules apply depending on whether the land is vacant or not, whether the proposed acquisition meets the conditions for lower threshold land, and the value of the proposed acquisition. For investors from Free Trade Agreement partner countries (including China and Singapore), FIRB Approval is only required if the target site is a developed commercial land with monetary value exceeding $1,134 million. FIRB Approval will also be required (regardless of any monetary threshold) if the target site is vacant commercial land, residential land or if the investor is a “foreign government investor” by FIRB’s definition.
- Planning and environment: Investors need to ensure their hotel development project complies with the applicable planning and environmental laws and obtain all necessary consents, permits, licences and approvals. The Sustainable Planning Act 2009 (QLD) provides the framework for Queensland’s planning and development assessment system. It sets out the laws and tools to manage land use and provides a sequence of planning at the state, regional, council, neighbourhood and site levels. Strategic components of the system include Regional Plans and the State Planning Policy. As an example, the Brisbane City Plan 2014 directs all building and development in the Brisbane City Council area. In terms of specific developments such as a hotel project, requirements in relation to permissible uses, heights, gross floor area, setbacks, incentive, car parking requirements depend upon the relevant Zones and Neighbourhood Plan areas within the Brisbane City Council.
- Construction: Construction is fundamental issue for a hotel development project. Investors need to deal with multiple parties and complex issues (e.g. work health and safety and industrial issues, building insurance, construction contracting, etc.). Investors need to have a mechanism in place to effectively manage contractual and commercial risk to avoid, minimise and resolve disputes with their builders and industry and regulatory bodies.
Please note that the above list of issues is not exhaustive. Investors should seek tailored professional advice on their respective hotel projects.
- This article was originally published in Australian Property Review magazine.