Croatia ranks third among European Union countries in terms of home ownership, with a significant 91% of Croatians residing in real properties they either own or are owned by a household member. Typically, Croatians primarily use these owned residential properties for personal residential purposes. However, residential real property ownership is also regarded as a lucrative investment avenue. Individuals and companies often invest in real properties, either residential or commercial, on a buy-to-let model. In recent years, a hybrid model of aparthotels arose on the Adriatic coast, in the spatial zones designated for tourism industry. The model allows private investors to own a condominium unit in the tourism zone, utilising it for a specific period annually while deriving profit from its commercial use for the remaining period.
Aparthotels combine the best of serviced apartment living and facilities of a hotel. Contemporary hospitality investors often construct hotels with the pertaining facilities and adjoining private villas or apartment buildings, forming one cohesive unit. The guests of these villas and apartments enjoy access to all the amenities that the hotel and the resort have to offer. Typically categorised as 5-star establishments, these hotels and resorts are usually managed by renowned brand operators.
Recognising the value of the investment, the hospitality groups are increasingly exploring a model wherein villas and apartments are sold to private owners as condominium units in exchange for a long-term lease or management agreement. Although not entirely novel, this model faces limited adoption in Croatia due to legislative constraints and relative unfamiliarity.
Structuring
In Croatia, real property represents an area of land, together with all that is permanently connected above or underneath it. Hence, if a building is built on the land, the real property in question would be the land together with such a building. Croatian law recognizes private ownership of real properties by natural and legal persons, citizens from Croatia, European Union member states, or other countries, subject to statutory requirements.
When there is more than one owner of real property, such real property is under a co-ownership regime. Co-ownership is established automatically when there are more owners of the same real property (co-owners). Such parts of ownership title are expressed in fractions (e.g., 1/2, 3/4, 93/100, etc.) and are called co-ownership portions. However, a need arises for separate sole ownership of certain parts of the same real property that is co-owned by more than one owner – ownership over separate parts of the real property, i.e. condominium units (Cro. etaža) such as apartments, business premises, offices, garages, etc. This is established through a legal concept of condominium ownership or ownership of a separate part of real property. Condominium units can generally be established on any building, but up until recently, it was not always possible to be established in the spatial zone “T1” for tourism use.
Zoning details are prescribed in the Croatian spatial planning legislation – Spatial Planning Act and spatial plans of state, county, municipal/city, or narrower/detailed levels. According to the old Spatial Planning and Construction Act (applicable until 2014), Article 71 prohibited the division of catering/hospitality buildings into separate condominium units unless such buildings serve solely for accommodation purposes (e.g., villas). The currently applicable Spatial Planning Act does not provide any such restriction. Based on the principles of the zoning laws and having in mind that the current Spatial Planning Act does not prohibit condominium ownership in “T1” zones, all catering/hospitality buildings in “T1” zones should be able to be divided into condominium units. The administrative bodies, namely officials working on the matters of issuing building permits are not harmonised in deciding whether or not to allow the establishment of condominium units in zones “T1”. Therefore, before any investment is made, the investors should confirm with the local bodies whether the establishment of condominium units is and will continue to be allowed for the specific real property.
Regardless of whether the condominium units are established on the “T1” real property, the zoning characteristics of the entire real property remain the same, i.e. the zone must be used for catering/hospitality service purposes.
Ownership and Management
The ownership right is the broadest property right in Croatia, allowing the owner to do as he pleases with the object and its benefits, and to exclude everyone else from it, unless contrary to third-party rights or statutory limitations. The ownership right can be limited against the owner’s will, only under the conditions and as specified in the statute. As with other objects, the ownership right over real property includes the authorisations specified above.
In tourism spatial zones designated as “T1”, condominium units can be bought and sold, but the change of ownership cannot evade the zoning use of the units, i.e., the units will remain within the catering/hospitality zone and would only be able to be used for such a purpose. Therefore, the investors must keep in mind that they can own the condominium units, but that residential occupancy is precluded. Hence, the investors cannot use the said condominium units as their residence and permanently settle in such units.
Furthermore, the condominium units must be managed by the authorised property manager, i.e., the manager of the hotel or resort where it is located and the investors' usage rights over the units are further limited. The exact usage rights of the units are usually determined in the sale and purchase agreement and management agreement. These agreements may specify usage periods for owners, alongside restrictions on encumbrances and other ownership encroachments. For example, the management agreement will usually determine whether the owner will be able to use the unit for a fixed period, for a fixed or maximum duration, based on prior notice, or not at all. It will also specify the compensation for unit management, leasing, and usage, which may be fixed, variable, or a combination thereof. Investors should consider the tax implications associated with owning, using, and leasing such units. Additionally, these agreements will typically impose other ownership restrictions such as the restriction to establish encumbrances, the pre-emption rights, the rights of first refusal, and similar.
Prior to committing to an investment, it is crucial for investors to thoroughly evaluate the commercial aspects of the deal and project the expected return on investment.
Conclusion
Over the past decade, there has been a growing interest in property investment within "T1" spatial zones and aparthotels. While certain "T1" areas may permit construction and condominium division, navigating their legal landscape in Croatia can be intricate due to its uncharted nature. It is important to note that dividing real property into condominium units does not circumvent zoning regulations.
Investing in aparthotels confers ownership rights over units, albeit with restricted usage privileges tied to the overarching resort management. Thus, condominium units in this context serve as a hybrid investment model, offering limited personal enjoyment alongside financial prospects.
By Sanja Novoselic, Attorney, Divjak Topic Bahtijarevic & Krka