Residential tourism developments (also known as condo-hotels), are in vogue in the tourism and real estate industry. The phrase 'residential tourism' is self-explanatory: it is essentially a development which grants tourists or investors ownership of the guest accommodation of a tourism facility.

This kind of real estate investment is not new; the concept appeared in the late 1970s and has proved popular in Portugal's Algarve. However, residential tourism is now undoubtedly much more sophisticated in terms of the brands involved, the quality of the services available and the legal structures required to do the deal.

Residential tourism developments are usually structured on a mixed-use basis, incorporating hotel facilities with communal amenities, golf, tennis and spas as well as a mix of freehold properties, branded hotel residences, apart-hotel units and buy-to-let units.

Some of the most famous brands are developing or managing this type of product all over the world with most of them already present in Portugal, such as Starwood through Westin, Sheraton, Luxury Collection, Ritz-Carlton, Four Seasons and Marriott.

According to some specialists, excellent investment opportunities still exist in Portugal, despite a recent property boom in the country and growing investor interest in central Europe (namely the Balkans, Bulgaria, Cyprus and Turkey) and in more exotic markets such as Cape Verde and the Caribbean.

Indeed, British interest in this kind of investment in Portugal remains high – Portugal is still one of the most important overseas markets for UK house buyers.

The legal framework

Residential tourism is heavily regulated in the US but, as far as we are aware, no such strict regulations exist in any key markets in Europe. Although there is no one single regulation covering residential tourism, this product has been developing in Portugal on the basis of some regimes set out in the current general legal framework for tourism. In short, what distinguishes a tourism facility from any other real estate facility is not only the specific legal requirements that are necessary for such premises (for instance infrastructure, common and tourism areas, equipment and services), but also the existence of integrated management.

In residential tourism, accommodation units are centrally managed but individually owned. According to Portuguese law, the type of tourism facilities which may be divided into units in order to be sold to third parties are the following: apart-hotels, tourism villas, tourism apartments, integrated tourism facilities (tourist villages) and resorts.

The units of such tourism facilities may be used by their owners in certain seasons, which cannot exceed 90 days per year. For the remainder of the year, the unit must be placed on the tourist rental market on a daily basis. In these cases, expenses relating to maintenance of the general area as well as the units themselves, are supported by the managing entity.

This type of unit comprises investment or second residences which may be used by its owners in certain seasons, but which are commonly included in a rental pool for the remainder of the year.

Notwithstanding the above, a percentage (legally determined) of a certain type of unit in the tourism facilities may be free and exclusively used by their owners (freehold units).

Within the limits laid down by the law, the owners are entitled to exclude their units from the tourism operation. The minimum percentage of units included in the tourism operation must be controlled by the managing entity. Failure to fulfil such requirement is subject to penalties. From the moment a unit is excluded from the tourism operation, its owner becomes responsible for the payment of the common charges incurred through maintenance, common infrastructures, equipment and services.

Freehold units comprise first and second residences, which are not rented to the public and where its owners live for long or short periods of time – many retired people would fall into this category.

Contractual issues

Residential tourism units may be bought for very diverse reasons, such as permanent or seasonal living and investment.

Where the units are excluded from the tourism operation and are not to be rented to the general public, only licensing and regulatory issues are raised in the agreements for its purchase and sale.

Where a unit is rented out to tourists during the periods when the units cannot be used by their owners, they are usually placed on the tourism rental market through specialised companies.

According to the programmes developed by the major brands, whenever the units are not being used by their owners, these must be put at the disposal of the managing entity in order to be included in a 'pool of units' to be rented in the tourism rental market on a daily basis.

Therefore, in addition to the sale agreements relating to the ownership of these units, another agreement is usually entered into between the owner and the managing entity, known as rental pool agreements.

As the name suggests, one of the key elements of these agreements is the creation of a common fund resulting from the individual income received from the tourism lease of the properties integrated into the scheme. The occupation of each unit is usually organised by rotation, with the order established following the order in which the properties joined the rental pool scheme. All monies resulting from guest occupancy are delivered to the managing entity, which allocates the same to the pool. No money is paid directly to the owners.

During the owner-occupancy periods, no payment is due by the owner, who is entitled to freely use all the services of the site which are available for 'regular' guests.

The owners of such units are entitled to a percentage of the income resulting from the total guest occupancy. The remuneration paid to the owners is usually calculated based on the net rental income of the rental scheme. The distribution of income to each owner varies, but it is normally proportional to the number of beds and to the number of guest occupancy days.

As a consideration for its services, the managing entity is remunerated through a percentage of the total income of the rental pool. In some cases, fees are also paid to the managing entity on account of specific services which may be agreed between the parties.

Observations for the future

The Portuguese Government has issued a political document setting out the actions deemed necessary for the sustainable growth of national tourism for the next 10 years.

Based on an analysis of the main trends in international demand, this plan defines 10 strategic tourism products, including market share, growth potential, aptitude and competitive potential.

Integrated resorts and residential tourism are among the 10 strategic tourism products defined in the plan, taking into consideration the evolution of the market, characterised by an increasing demand for residential tourism, and the potential it represents for the tourism sector in Portugal.

The legal structure adopted in the licensing procedure as well as in the contractual documentation to be entered into between developers, the managing entity and buyers are key issues to ensure appropriate and consistent quality of tourism facilities. Given the lack of a specific legal regime for residential tourism and that the general legal framework for tourism is still vague and unclear, particular attention should be paid to contract drafting and negotiation.

Nuno Sa Carvalho is a partner at Goncalves Pereira Castelo Branco in Lisbon.