Island’s Unique Tax Structure Drives Zeidel & Associates to Pivot from Lease Structure to Management Agreement
Situation
The owner of a luxury resort and private villa development in the Caribbean retained Zeidel & Associates to assist with a new project on a nearby undeveloped island, accessible only by boat, on which it wished to develop a restaurant and other amenities for guests and residents of the resort/villas. When the firm was hired, our client was in negotiations with a UK restauranteur to assist with the development and then to operate the amenities under a lease structure, with the firm’s client as the landlord. Zeidel and Associates was retained to formalize the documentation for this arrangement.
Approach
The firm needed to quickly synthesize the negotiations that occurred over the past several months to date and begin to paper the transaction. In the interest of expediency, we chose to work with a “heads of terms” generated by the tenant, with the expectation that the process would move faster using the tenant’s language, where acceptable, rather than starting with a new form, which we would have preferred. The heads of terms addressed several unique issues related to the development of the island’s infrastructure as well as the new building structures, docking rights, the phased development, termination rights for the board of residence owners, and many other issues.
In our discussions with our client’s local counsel, we learned about the unique tax structure on the island that would have made the lease structure and, therefore, the project unfeasible as it would have resulted in a heavy tax burden for the tenant. The tenant proposed several legal structures to address this issue, but we quickly understood that the solution was to scrap the months of lease work the parties had done before retaining Zeidel & Associates and to quickly pivot our strategy to a management structure more akin to the hotel management agreement in place, which had already passed muster from a tax perspective. The change in the legal relationships required us to rewrite the heads of terms to reflect the new structure, with language that maintained the agreed upon economic structure and rights and obligations of the parties, as much as possible, while creatively resolving the tax issues.
Result
While the shift at the 11th hour was no easy task, Zeidel & Associates’ extensive experience navigating between leasing to management agreements enabled us to pivot quickly and smoothly. We devised a management structure that the tenant accepted, so the parties could finalize the revised heads of terms. Zeidel & Associates is currently drafting the long-form management agreement.