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16 October 2003
In recent years The Bahamas has enjoyed a renewed interest in tourism, its leading industry, in the form of new development and the refurbishment and expansion of existing hotel and resort projects. The resurgence started when Sun International invested more than B$850 million to transform the Paradise Island Resort and Casino into Atlantis, a hotel and vacation complex featuring the world's largest saltwater aquarium, a marina, a golf course, a casino, a spa, a gym, restaurants, lounges, convention space and hotel rooms. Next door to the hotel is Harborside Resort, a vacation ownership resort being developed through joint efforts of Sun International and timeshare industry giant Starwood Vacation Ownership, Inc.
With miles of beaches, exotic flora and fauna, a tropical climate, close proximity
to the United States with relatively easy access by boat or by air, friendly
people and an enthusiastic government, The Bahamas has the right ingredients
for what many seek in a vacation experience. Perhaps due to the islands' similarities
to Florida in the United States, the Bahamian government looked first to Florida's
timeshare law when drafting Vacation Plan and Time-Sharing Act 1999.
This update provides a brief summary of basic pre-sale and post-sale requirements
and considerations for developing a timeshare project in The Bahamas, and then
discusses a few concerns regarding the act.
Persons engaged in constructing or developing, marketing, selling or managing a timeshare project in The Bahamas are required to be licensed as a developing owner, marketing agent or managing agent, respectively. Applications for these licences must be submitted to The Bahamas Investment Authority in the form set out in the Second Schedule of The Bahamas Vacation Plan and Regulations 2000. The developing owner, marketing agent or managing agent may be required to satisfy the authority that the timeshare project has made provision for the matters set out in the Second Schedule of the act, which include:
An applicant for a developing owner's licence must also satisfy the Bahamas Investment Authority that it has the financial ability to complete the development required for the timeshare project with all of the requirements necessary for its proper operation. The board will not grant a developing owner's licence unless it is satisfied that the purchasers of the timeshare interests will have a right to occupy and use those accommodations and facilities for certain periods, not in excess of six months in any year over a period of years not exceeding 40 years (although the board has the discretion to alter these time parameters). These licences remain in effect throughout the life of the timeshare project, unless sooner suspended, revoked or voluntarily divested. There are licence fees, plus an annual fee for the managing agent's licence. The fees currently range as follows, depending on the number of units in the timeshare project:
Application for sale of timeshare interests
The developing owner must obtain the Bahamas Investment Authority's prior approval in order to advertise, market or sell timeshare interests in The Bahamas. Although these terms are not defined in the act, the developing owner should refrain from taking any action which could in any way be interpreted as advertising, marketing or selling timeshare interests in The Bahamas without authority approval; otherwise, it may face severe penalties under the act, including jail for the principals and substantial monetary fines.
Ministry of Works
The developing owner should ascertain whether there are any zoning restrictions applicable to the property for the proposed timeshare project. Application must be made to the Ministry of Works for approval of the construction of the facilities and buildings comprising the timeshare project. Such application should be accompanied by copies of the building plans certified by a Bahamian architect; this process could take anywhere from six to eight weeks. On approval, the Ministry of Works will issue a permit number that authorizes the developing owner to commence construction. Following completion, a final inspection is made for the purpose of issuing a certificate of occupancy. The application fee is based on the total square footage of the building, including balconies and veranda, and currently calculated as follows:
Exemption from customs duties
The developing owner may be entitled to obtain an exemption from the payment of all customs duties in respect of any materials necessary for the construction of a timeshare project for a period of up to three years after the commencement of the act or such later date as the minister of finance may designate. 'Materials' are defined as:
"plumbing, electrical, mechanical and construction materials of all kinds necessary for the initial construction, furnishing and equipping of a new building so that the building is complete and ready for occupancy, but does not include stoves, refrigerators, kitchen appliances."
However, furniture, fixtures and equipment are ineligible for exemption. The exemption applies to materials of comparable quality with a price greater than the price of such materials in The Bahamas before the payment of custom duties, and to a timeshare project having accommodations of no less than 50 units on the main island of New Providence, which includes Paradise Island, or 25 units in any of the islands outside of New Providence, which are referred to as the 'Family Islands'. The developing owner is required to post a bond in an amount of twice the customs duties payable on the imported materials, unless the minister of finance accepts in lieu thereof alternative assurances such as a letter of credit or company guarantee by the developing owner.
The form of the timeshare contract to be executed by the purchaser must contain the provisions set out in the First Schedule of the act, including the disclosure of the purchaser's seven-day rescission right. The contract must be submitted and approved by the Bahamas Investment Authority. Thereafter, any material variation to the contract will require the written approval of the authority.
Public offering statement
Unless exempted, the developing owner must file with the Bahamas Investment Authority a detailed public offering statement containing numerous disclosures regarding the timeshare project. There is no required timeframe for authority approval, which may put the developing owner at a disadvantage with respect to project planning. The public offering statement must be given to each on-site purchaser prior to the execution of the purchaser's contract.
In addition to the basic documents that must be filed with the board, the developing owner also needs to file with the Bahamas Investment Authority, prior to use, all other documents used in connection with the timeshare project, including financing documents and documents for resort operations, such as a management agreement. The board may not require that all of these documents be delivered to purchasers.
If the developing owner finances the acquisition of the property on which the timeshare project will be located pursuant to a mortgage, or if there is any sort of debt instrument encumbering such property, the developing owner will be required to make provision for the inclusion of a non-disturbance clause in the underlying debt instrument for the protection of the interests of the purchasers. The act prohibits any foreclosure, exercise of power of sale, or any right or remedy under a mortgage or other debt instrument covering all or any portion of the timeshare project, to extinguish or impair any purchaser's interest in the timeshare project, irrespective of whether the mortgage is given or filed for record prior to completion of any such timeshare project.
Appointment of managing agent
The developing owner must appoint a managing agent, which may be the developing owner or a separate manager or management firm, prior to the first sale of a timeshare interest. The developing owner will be considered the managing agent of the timeshare plan, unless and until it clearly provides in the public offering statement that a different party will serve in such capacity, and that party has acknowledged in writing that it has accepted the duties and obligations of serving as the managing agent. In the absence of the appointment or on the resignation of a managing agent, the developing owner will be considered the managing agent of the timeshare plan. Notwithstanding the appointment of a managing agent, the developing owner will continue to be jointly and severally responsible for the obligations of the managing agent unless and until:
The act also sets forth certain duties of the managing agent.
Exchange control approvals
The Bahamas has an exchange control regime in place which provides for the regulation of the holding of Bahamian and non-Bahamian dollar currency or securities denominated in Bahamian or non-Bahamian currency, depending on whether the holder is deemed a resident or non-resident for exchange control purposes. A person deemed a resident for exchange control purposes includes a Bahamian citizen, a holder of a certificate of permanent residence and a holder of a work permit. A person deemed a non-resident for exchange control purposes includes any person that falls outside the term 'resident', or a person who would be deemed a resident but is designated a non-resident by the Exchange Control Department of the Central Bank of The Bahamas, the regulators responsible for the enforcement of the Exchange Control Regulations Act 1956. When a person is deemed a non-resident (a foreign developing owner) for exchange control purposes, that person may not deal in Bahamian currency, securities denominated in Bahamian dollars or shares in a company deemed resident for exchange control purpose (ie, shares in a Bahamian international business company incorporated under the International Business Companies Act 2000 that will either own property in The Bahamas or carry on its business in The Bahamas, or a domestic company incorporated under the Companies Act 1992), without the prior written approval of the Exchange Control Department.
Against this background, an application by the developing owner, marketing agent and managing agent should be made to the Exchange Control Department of the Central Bank of The Bahamas for approval of:
Each of the developing owner, marketing agent and managing agent must obtain from the Business Licence Department of the Ministry of Finance a business licence authorizing it to carry on business in The Bahamas. Application for a business licence must be made under the Business Licence Act, and the grant of such licence to a non-Bahamian is entirely within the discretion of the minister of finance and may be subject to such terms and conditions as he sees fit. The Business Licence Act also subjects licensees to an annual business licence fee, which is computed on a scale. The initial business licence fee for a new business is currently US$10. Thereafter, the annual business licence fee is calculated in accordance with Section 4(1) of the Business Licence Act.
Immigration work permits
Pursuant to the provisions of the Immigration Act, it is unlawful for a foreign person to engage in any gainful employment in The Bahamas unless, among other things, he is in possession of a valid work permit. This restriction applies even if the person is in The Bahamas for a very limited period of time in connection with a specific job.
Permits for all non-Bahamian employees of the developing owner, marketing agent and managing agent must be obtained from the Department of Immigration. Positions that the developing owner desires to fill must be notified to the Department of Labour for advertisement. As a matter of general public policy, preference must be given to qualified Bahamian nationals, although the government is open to granting work permits to senior managers of the developing owner and such work permits may be requested at the time the developing owner submits its application to the Bahamas Investment Authority. The work permit application fee currently is US$25 and the annual work permit fee currently ranges from US$650 to $10,000, depending on the type of position. Thus the developing owner must plan to hire and train Bahamian nationals as a substantial part of its workforce.
Registration of trademarks
The developing owner, marketing agent and managing agent may wish to consider registering any trademarks or trade names in the Registry of Trademarks. Application for the registration of a trademark is made to the registrar general in a statutory form provided by that office. The application and registration fee currently is US$20 for each class in which the trademark is registered and the annual renewal fee is US$40. It could take anywhere from 12 to 18 months for an application to be processed. A trade name may be registered within a week under separate application to the registrar general.
Prior to entering into any contract, the developing owner must establish, and thereafter maintain, an escrow fund with a financial institution doing business in The Bahamas that is approved by the minister of finance. Proceeds of all on-site sales of timeshare interest must be paid into this account. In the absence of the cancellation of a purchaser's contract within the statutory seven-day period:
In lieu of the establishment of an escrow fund, the Bahamas Investment Authority may accept from the developing owner an alternative assurance, including a surety bond, letter of credit or even a company guarantee issued by the developing owner or its parent company (provided that the authority is satisfied that the developing owner or its parent company has a net worth in excess of US$25 million and is otherwise financially sound). While the act does not prohibit the developing owner from using the cash held in the escrow fund as collateral security in support of any loan or other financial obligation of the developing owner, it may not be of much value for a developing owner to do so in view of the foregoing distributions that are required to be made from the escrow fund following the expiration of the seven-day statutory rescission period.
The developing owner must establish and maintain a sinking fund with an approved financial institution, into which 5% of the on-site and off-site sales proceeds are to be deposited until the sinking fund contains not less than 5% of the total construction costs incurred to that time on the timeshare project. The monies in the sinking fund are to be held by the developing owner in trust for the benefit of all of the purchasers for the purpose of making any repairs, alterations or replacements necessary to the premises of the completed timeshare project as a result of defects in materials or workmanship. Purchasers may have other remedies under Bahamian law for such purposes; however, such remedies are beyond the scope of this update. Any sum paid to the sinking fund may be repaid to the developing owner any time following the expiration of three years after the construction of the timeshare project is completed. In lieu of the sinking fund, the Bahamas Investment Authority may accept from the developing owner an alternative assurance, including a surety bond, letter of credit or even a company guarantee issued by the developing owner or its parent company (provided that the Bahamas Investment Authority is satisfied that the developing owner or its parent company has a net worth in excess of US$25 million and is otherwise financially sound). The monies in the sinking fund may not be used as collateral security in support of any loan or other financial obligation of the developing owner.
The developing owner must establish a trust fund with an approved financial institution for the deposit of monies in excess of the amount required to be deposited in the sinking fund. Disbursements from the trust fund may be made to the developing owner on proof of the issuance of a certificate of occupancy with respect to the completion of the timeshare project. Any interest accruing on the monies held in the trust fund will be for the account of the developing owner. In lieu of the trust fund, the Bahamas Investment Authority may accept from the developing owner an alternative assurance, including a surety bond, letter of credit or even a company guarantee issued by the developing owner or its parent company (provided that the authority is satisfied that the developing owner or its parent company has a net worth in excess of US$25 million and is otherwise financially sound). The monies in the trust fund may not be used as collateral security in support of any loan or other financial obligation of the developing owner.
Sales in other jurisdictions
The act requires the developing owner to file with the Bahamas Investment Authority a public offering statement that contains all of the pertinent documents used in connection with the timeshare project, including all sales, marketing and registration materials to be used in jurisdictions other than The Bahamas. The public offering statement is subject to the authority's approval, unless an application for exemption from this requirement is granted by the authority. The authority may grant either a partial or complete exemption if it (i) determines that the foreign jurisdiction in which such timeshare project is advertised, marketed and sold (as the case may be) makes adequate protection for purchasers, and that such protection will be extended to any such purchasers who purchase their timeshare interests as a result of such advertising, marketing or sale activity; and (ii) is satisfied that the person making such application is financially sound.
The developing owner must provide and maintain for the benefit of all purchasers and their guests public liability insurance in respect of the accommodations and facilities to be used under the timeshare plan in an amount of at least US$1 million, or such greater amount as the Bahamas Investment Authority may impose from time to time. The developing owner also must keep all of the property of the timeshare project of an insurable nature insured against loss or damage in an amount not less than the replacement cost of such property. The developing owner may delegate or assign the foregoing responsibilities to the managing agent; however, the developing owner will remain jointly and severally responsible for such compliance until:
The existence of an owners association will not exonerate the developing owner from this liability.
Registration of contracts
The developing owner or its managing agent must apply to the registrar of vacation plans and time-sharing for the purpose of registering each purchaser's rights in the Register of Time-Sharing Interests within 60 days of execution of the contract. The developing owner or the marketing agent is also obliged to apply to the registrar to register all successor timeshare owners on becoming aware that a timeshare interest is no longer owned by a previously registered timeshare owner. Neither the act nor the regulations impose such a duty on the managing agent. However, the developing owner may delegate such a duty to the managing agent, provided that the developing owner will remain jointly and severally liable for compliance with this requirement. It is unclear how the developing owner would become 'aware' of a resale other than its reacquisition or its resale of a timeshare interest which it sold. This seems overly burdensome on the developing owner if the developing owner is not involved with transfers of timeshare interests other than its own.
Issuance of certificate of purchase
The developing owner must provide each purchaser with a certificate or other evidence of such purchaser's timeshare interest within 60 days of the execution of the contract in a form approved by the Bahamas Investment Authority.
With respect to foreign purchasers, application should be made to the Exchange Control Department of the Central Bank of The Bahamas for 'approved investment status'. This may be accomplished by a simple letter of application to the Central Bank, and could take anywhere from four to six weeks. There is currently no government-imposed cost for this service. Although not required, such designation will facilitate the conversion of Bahamian currency to a foreign currency of choice on the sale of a purchaser's timeshare interest to a person who may only deal in Bahamian currency. For example, a person deemed a resident of The Bahamas for exchange control purposes may only acquire such property in Bahamian dollars, as he is prohibited from dealing in any foreign currencies.
The developing owner will need to file with the Bahamas Investment Authority prior to use each amendment to any document required to be filed with the authority, and all other documents used in connection with the timeshare project to be used after the initial filing. In addition, the developing owner is required to obtain the prior written approval of the authority with respect to any material variation of the contract for the timeshare project.
Act limited to right-to-use products
The act only provides the developing owner with the ability to offer a right-to-use timeshare product, although the board is given authority to waive this requirement. This appears somewhat restrictive, given the different types of ownership options available in other countries. Most timeshare lenders prefer financing timeshare receivables derived from deed-based products. Moreover, as they currently do in the United States, deed-based products may offer developing owners in The Bahamas other advantages such as more favourable tax treatment, which right-to-use products do not.
If the Bahamas Investment Authority does grant an exemption to offer deed-based products, the developing owner may need to apply for additional exemptions from the act because the act does not fully contemplate such products. For example, the act only allows the timeshare plan to exist for 40 years. This may be problematic for a developing owner that wishes to convey interests in the real property comprising the timeshare plan; however, there are a couple of different ways to address this issue, depending on the business goals of the developing owner.
Another example is that the act requires the developing owner to apply to the registrar to register the rights of each purchaser within 60 days of the execution of the contract. The registrar is then required to enter on the register the particulars of the purchaser on receipt of the executed contract. If the legal estate and timeshare interest will be conveyed by deed, the deed must be filed in the Registry of Records for recording purposes. It may take four to six months before the deed is returned. In that circumstance, the registrar should be authorized to accept a copy of the deed as evidence of ownership in lieu of a copy of the executed contract.
In addition, liability is imposed under the act on the developing owner for the management of the timeshare plan (including the accommodations and facilities of the timeshare plan). The act provides that the developing owner will automatically be liable for any offence of the managing agent, unless the developing owner can prove the offence took place without its knowledge or consent, or that it exercised all due diligence to prevent the commission of the offence. The act fails to contemplate that a timeshare project may be governed by an association which is ultimately controlled by purchasers and is responsible for such activities and others under the Law of Property and Conveyancing (Condominium) Act, and this omission is unfair to the developing owner. The act should be amended to provide that the managing agent is the association when the developing owner is offering deed-based products in a condominium, and that the various management liabilities imposed upon the developing owner be imposed upon the association instead (at least at the point at which the developing owner yields control of the association to the purchasers).
Arbitrary reserve requirements
The act currently requires reserve of 10% of the budget for the timeshare project. This amount may be insufficient in some cases and too much in others, and there is no guarantee that the Bahamas Investment Authority would grant an exemption from this requirement. The act should be amended to create more flexibility in this area for the manager, perhaps by establishing certain categories of important items for which reserves must be made (eg, roof replacement, building painting, pavement resurfacing, replacement of timeshare unit furnishings and equipment, and any other component the useful life of which is less than the useful life of the overall structure), and providing for amounts to be reserved based on the estimated useful life and replacement cost of the items, as is done in Florida.
Authorization of purchaser public offering statement
The act requires that numerous documents be filed with the Bahamas Investment Authority, but if the developing owner obtains exemptions relieving it from delivering all of these documents to the purchasers, the developing owner will want to use an abbreviated public offering statement. It is likely that the developing owner would want this exemption for any filing. In addition, it would save the authority time and effort with respect to entertaining exemption requests and potentially reviewing any public offering statement. The act should be amended to include a few short provisions to this effect.
Authorization of disclosures regarding certain amenities
Part I of the act includes broad definitions of 'timeshare plan' and 'timeshare project'. A 'timeshare plan' is any arrangement, plan, scheme or device (other than an exchange programme) whereby a purchaser receives, directly or indirectly, a right to use and occupy accommodation and any related facilities for a period of time less than six months on a recurring basis over a period of at least three years, but not necessarily for consecutive years.
A 'timeshare project' is any premises or complex of premises (whether contiguous
or not) and the grounds appurtenant thereto that are subject to or included
within a timeshare plan.
The developing owner would not want to have everything be construed as part of the timeshare plan or timeshare project, especially as the act requires that the developing owner must have
"made provision for the inclusion of a non-disturbance clause in all debt instruments (where there is recourse against the timeshare project) for the protection of the interests of all time-sharing purchasers."The developing owner is also required to make
"provision not to encumber the timeshare project with a mortgage or other similar instrument, subsequent to the sale of any time-sharing interests in the project, without the written consent of not less than 51% of the then existing time-sharing purchasers, other than the developing owner, marketing agent or managing agent, as the case may be."
In this regard, it would be better if the act were amended to have different requirements with respect to different types of amenities offered to purchasers. For example, the interests of interest holders in the accommodations and facilities of the timeshare plan should be required to be subordinated or non-disturbed in favour of purchasers. However, there may be other amenities which are not considered part of the timeshare plan and which the developing owner would like to be able to offer to purchasers, which are encumbered but not subordinated or non-disturbed. The act should be revised to provide that these types of facilities could be offered along with certain disclosures to the effect that they are not subordinated or non-disturbed.
Need for time limits
The act currently provides no time limits for review of filings by the Bahamas Investment Authority, which is somewhat problematic for the creation and operation of timeshare projects. Developing owners would prefer that the act be amended to provide for reasonable timeframes in this regard.
Registration under the Real Estate (Brokers and Salesmen) Act
Pursuant to the Real Estate (Brokers and Salesmen) Act 1995, any person who engages in the practice of real estate business (which includes the sale of deed-based timeshare interests) must be licensed under the act. A developing owner who sells its real property must pay certain fees, including the prescribed registration fee of US$100 (which includes the membership fee in the Bahamas Real Estate Association), an initial licence fee of US$50 and an annual licence fee of US$200 (including the membership fee in the Bahamas Real Estate Association) to the Real Estate Board for the purpose of registration. This requirement represents another cost to the developing owner and an additional step that must be taken before the developing owner is in a position to proceed with the sale of the timeshare development.
Despite these drawbacks, The Bahamas appears to offer the necessary elements for timeshare development. The willingness of the Bahamian government to waive certain requirements of the act in some cases is encouraging, and if the Bahamian government makes appropriate amendments to the act to assist the industry, perhaps such efforts will help to ensure that developing owners and purchasers alike will find The Bahamas increasingly attractive.
For further information on this topic please contact Kenred Dorsett or Bryan Glinton at Lennox Paton by telephone (+1 242 502 5000) or by fax (+1 242 328 0566) or by email (email@example.com or firstname.lastname@example.org).
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Kenred MA Dorsett