P&A INTERNATIONAL CONSULTING, PT

Structures For Acquiring Real Property In Bali, Indonesia

INTRODUCTION

This is a general overview of the legal structures in Indonesia in respect to land and property investments. This memorandum is for information purposes only, and is based on independent research carried out by P&A International Consulting PT in Bali, Indonesia, which is affiliated with Pinci & Associates, PLLC, New York (www.pincilaw.com). Relevant Indonesian laws and regulations were searched, and specific interviews were carried out with a number of different high standing local practicioners, including Balinese notaries, lawyers, civil engineers, planning and zoning officials, foreign investment agencies, as well as local builders and international developers presently active in Bali. As in any other jurisdiction, prior to finalising any transaction or investment decision, it is always required to seek specific, transaction specific local legal advice, which can be arranged by P&A International Consulting PT upon request.

P&A Consulting PT provides international business advisory services in Bali, Indonesia, to a variety of international clients on areas including real estate management, leasing, due diligence, building and related transactions, as well as on a number of other commercial areas, including international joint ventures and business negotiations, commercial distribution and licensing arrangements in areas such as fashion,technology, audiovisual, telecommunications, energy, waste management and processing, broadcasting, movie distribution and production, import-export, and other areas. P&A International Consulting PT coordinates and interfaces on behalf of its clients with local professionals and government officials, such as project managers, lawyers, notaries, bankers, real estate brokers, accountants, engineers, architects and builders, providing international business advice on corporate and acquisition strctures, investment strategies, acquisitions, sale & purchases and business reorganization matters. P&A International Consulting PT has opened its offices in Seminyak, Kuta, Bali in September, 2005.

I. General Overview
Here below is a very summary outline of the main real property rights under Indonesian law, relevant for acquisitions of real estate in Bali by foreign buyers/investors. All rights described below originate from the main Indonesian real estate law, called the “Basic Agrarian Law” (Law N. 5/1960, entered into force on September 24, 1960 also referred to as UUPA (Undang-undang Pokok Agraria, or the Basic Agrarian Law Act). Despite the word "agraria" in the title, the UUPA not only regulates agricultural land, but all land; urban land, forests, rice lands, plantations, mines, and coastal waters including fisheries.

1.Hak Milik – The Right to Own Land (“Freehold Title Ownership”)
This is roughly equivalent to Freehold title of English Common Law. It is a property right duly recorded in the local real estate registries, and may be used as collateral for local morgage financing. Freehold title may only be held by Indonesian citizens, or by Indonesian legal entities that are entirely owned and controlled by Indonesian citizens. It is therefore not possible for a foreign individual to have direct freehold ownership of land in Indonesia.

Companies incorporated in Indonesia that have a foreign equity component (known as PMA companies) are not allowed to possess freehold title over land and are compelled to use other titles such as Hak Guna Bangunan (see Par. I. 3, below).

However, an Indonesian citizen can give a foreign national all rights to use the land by way of a nominee arrangement, which includes typically also a loan, a recorded mortgage, and related powers of attorney to use, manage, and dispose of the real estate, all as described in detail in Section II, below.

2.Hak Pakai – The Right to Use Land
This is the right to use land for any purpose, and is technically, the right of utilization of state land. The right is granted for an initial period of 25 years plus additional 20 years renewals; it may be thereafter renewed again for futher 25 years periods, subject only to payment of the renewal tax, currently assessed at only nominal amounts on the cadastral value of the real estate.This type of title should not be confused with a lease contract. As outlined more in detail below, foreing residents of Indonesia may hold Hak Pakai title directly in their name, which is recorded in the real estate registries and on all title certificates issued with respect to the real estate.

3.Hak Guna Bangunan (HGB) - The Right to Build on Land
The right to build on land is a type of leasehold that includes the right to build or construct on land. This form of title is available to Indonesian individuals, Indonesian companies, and Indonesian companies controlled by foreigners, known as PMAs. This type of title may be granted for an initial period of 30 years, and extended for two additional periods of 30 and 20 years (for a total of 80 years); thereafter it may be renewed for additional 30 years periods, by payment of an HGB tax; such subsequent renewals entail the right to then renew for two additional periods of 30 and 20 years, and so on. The level of taxation is set by the local Government. HGB is a real property right, and as such is recorded in the land registries and appears on all land title certificates. It may be transferred to third parties by sale, gift or inheritance, and may be used as collateral for local mortgage financing.

II.Acquisition Structures Used by Foreigners to Purchase Real Estate In Indonesia

Under current practice, there are three basic ways for foreigners to own land in Indonesia, as follows.

1. Using an Individual Indonesian Nominee
The most common way for foreigners to acquire freehold rights to land in Bali is to acquire freehold title in the name of an Indonesian individual, i.e. to use an Indonesian nominee to purchase the property. This method has been used for many years and a clear process has now evolved with legal precedents being established.

Once the appropriate site has been selected, the selected Indonesian nominee purchases the freehold title (Hak Milik) to the land from the previous owner. At the same time of acquiring the Hak Milik, the Indonesian individual completes three additional agreements with the foreigner:

a)A loan agreement which acknowledges that the foreigner has loaned to the Indonesian citizen the purchase price of the land. This is then registered on the land as a first mortgage and it is noted on both the title at the Land Department and the copy held by the owner. There can be no dealing in the land until the loan agreement is cleared from the title documents. With the foreigner's loan details registered on the title, it also prevents the reissuing of new title deeds without the foreigner's consent.

b)An irrevocable power of attorney is signed giving the foreigner complete authority to sell, mortgage, lease, build on, improve or otherwise deal in the land. Without notice to the Indonesian citizen, the foreigner can sell or otherwise deal in the land. It is important to include the power for the foreigner to freely substitute the nominee at any time.

c)A permanent right of use agreement is completed, giving the foreigner rights to use and occupy the land.

To cover the event of death of the nominee, the Power of Attorney is drafted in such a manner so that the governing conditions are passed on to the heirs. In the event of subsequent dispute with the nominated Indonesian, the Power of Attorney allows the foreigner to sell the land to another Indonesian.

A reasonable remuneration for the nominees should be agreed at the time of appointment. Normally, such remuneration is structured as a percentage of the gains realised by the foreigner in the event of sale of the real estate.

2. Using a PMA Company
Some foreign investors may find the first method unacceptable due to third party ownership. Those looking to purchase a large site and subsequently divide the site into smaller parcels that are individually sold may also wish to utilize a PMA Company.

A foreign investor can effectively control 100% of the shares in a PMA in which case the HGB form of title is available. HGB is valid initially for 30 years and a further extension of 30 years and then another 20 years (for a total of 80 years); subsequently, the HGB may be renewed for similar periods of 30 years, with the right to extend for further 30 and 20 years periods. (A renewal is necessary because local real estate companies, including PMAs, have a term of up to 75 years). Most international hotels in Bali have used this form of ownership. Developments which require subdivision, such as golf course villas, shared villa developments or a small apartment building are usually held by a PMA, where the stock of the Company is sold, with the subdivided titles representing the capital asset of the stock.

PMA entities are quite regulated and must submit semi-annual comprehensive reports on the status of the company including payment of taxes, all assets acquisitions and changes in ownership to BKPM, the central administering authority for PMA companies in Indonesia.