Seven questions: Rental guarantees for condo investments
Secured property investments with 10% rental guarantee for 10 years! Perk or gimmick? Will your investment pass the pandemic stress test?
Thailand’s property industry experiences a shift from foreign investments for own residential use into structured investment schemes. To this category belong shared or fractional ownership, timeshares, and rental guarantee investment offers. The structuring requires sophisticated legal know-how not only on the developer’s side but also by the (foreign) private investor. If foreign property acquisitions or long-term rents are not made for immediate own residential use, but for use in later years or for the generation of rental income and value increase, it is generally a good idea to transfer the property management for an interim period to a third party.
Before the pandemic, and even now, specialized property developers offer or had offered a package of sale or long-term rent agreements combined with rental guarantees, buyback agreements, and even cash refund options. Typical services include full services as check-ins/outs, transfers, cleaning, bed sheet changes, pool and garden care, and cover the costs of maintenance and damages made by tenants, electricity, water, cable-TV, internet bills and common area payments for security, garbage disposal and so on. Such a structured property investment makes it easy and convenient for the foreigner to secure his piece of paradise without the need to own property management if such a business model us stabile till it ends.
During the rental guaranty period, the property is rented back to the developer and aggressively managed and marketed on a short-time basis (serviced apartment, condotel, AirBnB, or similar) to maximize the return on investment. Unknown subtenants inhabit the villa or condo but the investor (landlord) has no direct legal relationship with them. Additional business aspects are discussed at LinkedIn in the article “Rental guarantee investments in Thailand’s condominium industry” The foreigner is promised to receive payments regardless of whether the unit is rented or not. In addition, he is provided with the offer to stay at his or similar property without charge for a few weeks per year. The conditions vary depending on the project.
Scams, Ponzi schemes, and excellent investment opportunities
A rude awakening: Guaranteed rental schemes had there place in a booming tourist industry with open borders, high growth in tourist arrivals, overnight stays, and a prospering economic situation. Under the current worst-case scenario, it should be no surprise that the stress-test of the pandemic ends in a rude awakening. Rental guarantees have a certain characteristic, which should be clearly understood before the investment is made. A prudent due diligence examination would have shown whether the specific contractual framework and the factual circumstances make the developer’s rental guarantee scheme a reasonable investment for the foreign investor or a marketing scam – or something in between. In hindsight, everyone is always smarter. Therefore, the focus should be now to identify the status-quo and options for actions. These seven aspects are relevant:
#1. Is the property in good shape? Is it a condominium development or an apartment complex? Is the developer the true owner of the whole advertised land? Are proper construction permits in place? Do the building plans as marketed respect the building regulations, the environmental and local zoning laws, or did they find a way to ignore them? Are there any pending litigations or public opposition against the property development? Is the developer in-line with his own promises and the advertised time schedule?
#2. Is it a straightforward property purchase agreement or else? Does the agreement fulfill all the requirements to transfer legal ownership to the foreigner? Does the foreigner take over any risk on this aspect? Is it a freehold or a leasehold investment, and what does this mean in practice? Does the investment has any limitations or conditions? Does the foreigner benefit from any consumer protection right and/or has protection under Thailand’s Condominium Act?
#3. What are the implications of the off-plan structure? How are the payments made for a not yet existing property secured? To which extent is it guaranteed that the payments are utilized for the individual unit that the foreigner buys, and not for other purposes? What is the purpose of the cash-back clause and how are the cash-back payments taxed by the foreigner? What are the consequences if the erection of the building is delayed or abandoned?
#4. What are the pros and cons of the rental guarantee? Is the rental guarantee a legally valid obligation or just an empty promise? A lease agreement or a rental management agreement? Does it efficiently shift all the rental risks to the developer? Will it survive an inheritance or an exit scenario? Are the details of the rental guarantee agreed in the beginning, or at a later stage when the foreigner has no negotiation power? Will the guarantee be secured by registration on the property document (Chanote)? What is the stance of Thai and foreign banks to finance rental guarantee schemes?
#5. How does the buy-back option really work? How is the foreigner legally and economically protected that he can make use of the buy-back option? Is it a legally valid obligation or just an empty promise? Does it efficiently shift all the depreciation, the decline in value, and the damage risks to the developer? Will it survive an inheritance or an exit scenario? What are the consequences of an insolvency scenario? Are the details of the buy-back option agreed in the beginning, or at a later stage when the foreigner has no negotiation power? Will the buy-back option be secured by registration on the property document (Chanote)?
#6. What happens when the laws or policies change? Who takes the risk that the current legislation, including tenant protection regulations, Consumer Protection Act, Hotel Act, Condominium Act are enforced? Who takes the risks that the current legislation, regulations, and industry practices change for the disadvantage of the profitability? How future-proofed is the specific investment structure?
#7. Is it a Ponzi scheme? Would Thailand’s courts deem the specific model as a pyramid system and Ponzi scheme? What would be the consequences for the project and the foreign investor?
Professional services from Bangkok: Due diligence, consulting, litigation, legal project management
PUGNATORIUS Ltd. offers for foreign investments in guaranteed rental projects comprehensive due diligence of the legal, financial and economic aspects. Insights that are not available in the glossy marketing brochures. A solid basis for a well-educated investment decision whether the guaranteed rental payment is more than a partial repayment of an overpriced purchase price.
Assignments on real estate investments are one of the core business activities with a particular competence, long-standing experience, and unique market reputation of PUGNATORIUS Ltd. The Bangkok-based law firm typically provides these seven services: (i) investment structures for foreign property acquisitions, (ii) property due diligence examination, including rental guarantees, timeshares, and fractional ownership structures, (iii) leasing transactions and protected lease schemes, (iv) Industrial estates, resorts, factories, (v) hotel and hospitality projects, (vi) property tax structuring, and (vii) legal opinions and property investment reviews.
Details are described at “Legal services and tax planning for real estate acquisitions and property developments.”