Because the moratorium limits new resort building, the most available opportunity in Canary hospitality is not construction but transformation: buying an ageing, obsolete or underperforming resort and repositioning it into something current. This is a value-add play in one of Europe’s strongest tourism markets, and it comes with a specific set of incentives, risks and disciplines that an investor has to understand before falling for a discounted price.
Why the opportunity exists
The Canaries have a large stock of tourist accommodation built in earlier decades, much of it now dated, under-invested or below the standard today’s visitor expects. In a market where new resort beds are hard to authorize, that obsolete stock is where the value sits: it can be bought at a price that reflects its tired condition, and turned into an asset that commands current rates. The gap between what the asset earns now and what it could earn after work is the whole thesis, which is the value-add logic we set out in our note on core, core-plus and value-add.
The preference for renewal is written into the law itself. The tourism guidelines approved by Ley 19/2003, in Directriz 24, give the renewal of the existing tourist stock a strategic and priority character, because it is more sustainable and reuses existing urban and built stock efficiently. Ten years later, Ley 2/2013 on the renewal and modernisation of tourism in the Canaries declared as its object the promotion of the renewal and modernisation of obsolete tourist developments and facilities, while modulating the growth of the tourist stock. The policy that restricts new building and the policy that encourages renovation are the same policy, which is why the thesis holds.
What the moratorium actually restricts
Much of what is commonly called the moratorium now sits in article 4 of Ley 2/2013, read together with the tourism guidelines and the island planning it refers to. On Lanzarote, Fuerteventura, Gran Canaria and Tenerife, article 4 makes prior authorization a necessary requirement for the planning licence for tourist accommodation places, and grants it for new establishments only in the cases that article lists. Two of those cases matter directly to a repositioning: an establishment whose prior authorization has not lapsed and whose owner asks, voluntarily or to comply with the applicable rules and plans, to modify it without increasing the number of authorized places, and an establishment that had an authorization, ceased trading, and seeks to renew within the planning framework and a modernisation plan in order to resume. Hotels located on consolidated urban land that is not tourist land sit outside the prior authorization requirement, although they must still meet the standards of the category sought.
The consequence for an acquirer is that the existing authorization is part of what is being bought. A resort that still holds its authorized places can seek to renovate within them under the first of those cases, the one for an unexpired authorization; the question to ask in diligence is whether that authorization is live, how many places it covers, and whether the planned works add places, because renovations and extensions that increase places can require prior authorization where island planning rules demand it.
The incentives reward exactly this
Renovation and repositioning of obsolete tourist establishments are precisely the kind of investment the Canary regimes encourage. The moratorium treats quality upgrades differently from new capacity, and the reserve for investments in the Canaries rewards committing profit to productive assets in the islands, which a refurbishment is. We set the reserve out in our note on the RIC. For a repositioning investor, the tax regime and the planning regime point in the same direction, which is unusual and valuable.
The moratorium closed off new building and, in doing so, made the tired old resort the most valuable thing on the island: the one asset you are allowed to transform.
On the planning side, article 10 of Ley 2/2013 lets renovation projects that meet the law’s requirements access increases in buildability and, for accommodation establishments, an adjustment of the density standard and, where applicable, the right to additional places. Under article 13, a renovation that reaches the minimum investment per place set by category in the annex to the law, which the Canary Government may update, gives a right to authorization of additional places of up to 50 per cent more than those already authorized, which may be increased by a further 25 per cent for each category step gained starting from the three-star category, and never beyond 100 per cent of the pre-existing places. Renovation projects that use these incentives do not need prior tourist authorization unless they intend to add places to the renovated establishment.
The incentives have edges. Article 10 withholds them from renovations that leave a hotel below three stars, that convert a hotel into a non-hotel establishment with fewer stars, and that turn a non-hotel establishment into a hotel without all the owners guaranteeing a single permanent operating unit in a public deed entered in the Land Registry. The Canary Government may also limit by decree the incentives that create new places, where it finds with reasons that new places would harm the sustainability of the model or exceed the carrying capacity of the area. The right to authorization for additional places not built on the renovated plot is entered in the island register, may be transferred to a third party, must be used on tourist land on the same island, and under article 21 lapses five years after its entry in the General Tourism Register.
How the reserve fits a repositioning
On the tax side, the instrument this note relies on is the reserve for investments in the Canaries in article 27 of Ley 19/1994. A company subject to corporate income tax can reduce its taxable base by the amounts it allocates to the reserve, up to 90 per cent of the undistributed profit obtained in the same period from its establishments in the Canaries, without the reduction making the taxable base negative, and must then invest those amounts within three years from the accrual of the tax for the year of the allocation. The law treats the investment as made when the assets enter into operation, so for a refurbishment the date that matters is when the renovated assets enter into operation, not when the invoices are paid. The article also allows investments made in advance to count against reserves allocated from the profits of that year or the three following, provided the remaining requirements are met, the allocations are made from profits obtained while Regulation (EU) 651/2014, or the rule replacing it, is in force, and the investment and its financing are reported with the tax return for the year in which it is made.
For an acquisition, article 27 allows land, built or not, to count where it is assigned to one of the uses the article lists, and one of them is tourist activity under Ley 7/1995 on tourism in the Canaries where the purchase has as its object the rehabilitation of a tourist establishment. Solely for the purpose of including the value of the land in the amount invested, rehabilitation means works of renovation, extension or improvement that qualify to be capitalised as additional value of the property. Paragraph 12 adds that used assets and land must not have benefited earlier from the reserve, for allocations made from profits of periods beginning on or after 1 January 2007, or from the investment deductions it names, although a used asset that benefited only in part remains eligible for the proportional remainder.
The law draws one line that matters for holiday homes. The reserve cannot be invested in acquiring property used as vivienda vacacional, the holiday home modality as the article defines it by reference to Canary decrees, nor in rehabilitating or reforming such property. A repositioning that stays within hotel or other tourist accommodation can use the reserve if it meets the rest of the article; whether units could be turned into holiday homes at all is a separate question under Canary tourism and planning law, which we look at in our note on holiday rentals in the Canary Islands.
What the work actually involves
Repositioning a resort is more than a refurbishment. It can mean moving the property up a category, changing its target market, reconfiguring rooms, adding facilities, and often re-permitting the changed use. Each of those has a cost, a timeline and a planning dimension, and the capital budget is where these projects most often go wrong, because an old building reveals its problems only once work starts. The discipline is the same as any value-add asset, set out in our note on the business plan behind a managed asset: a costed plan, a realistic contingency, and a downside case.
Older resorts raise a density question as well. Under article 12 of Ley 2/2013, an establishment whose enabling title predates the entry into force of Ley 7/1995 and that does not meet the density standard fixed by planning keeps the density that results from its authorized places when it is renovated. It may increase its places only if it rises to at least three stars as a non-hotel establishment or four as a hotel, adds or substantially improves complementary facilities together with measures on quality, energy efficiency and environmental management, and meets the regulatory tourism standards without dispensation from the standard on gardens and sports or recreation areas, although roofs used for those purposes may count, all within the buildability, height and plot coverage that planning allows. The target category is therefore not only a commercial choice: it decides which of these routes is open.
The risks specific to the Canaries
Beyond ordinary construction risk, a Canary repositioning carries local specifics: the planning status of the existing establishment, whether the changed use can be authorized, the treatment of any protected or non-conforming elements, and the position of any tour operator contracts attached to the property. An investor buying an old resort is buying its history as well as its bones, and the diligence has to cover both, which is the discipline in our note on legal due diligence before you buy.
Ley 2/2013 also attaches duties to the building. Article 5 prevents authorized establishments on tourist land from changing their accommodation units to residential use, unless planning instruments or legislation that sets the specialisation of uses provide otherwise, and article 23 obliges the holders of tourist establishments to use them for tourist activity in line with the use planning assigns to the plot, subject to the specific rules for villas. Under article 22, those holders must also conserve and rehabilitate the property, whatever the ownership and operating arrangement, and the tourism administration can order the works after a contradictory procedure, among other cases where functionality has become inadequate through obsolescence. The obligation the tourism administration can impose is capped at 75 per cent of the replacement cost of the buildings or installations concerned. If the person obliged does not comply within the period set, the administration can declare the breach and carry out the works at that person’s cost. A resort bought because it is obsolete may be one the administration already has in view.
What the tax authority checks afterwards
The reserve is not earned when it is allocated. Under article 27, the assets in which it is invested must remain in operation in the acquiring company for at least five years, and land for ten, without being transferred, leased or ceded to third parties for their use. If an asset leaves earlier, the requirement is not breached where a replacement meeting the requirements is acquired for its net book value, before or within six months of the removal, and stays in operation for the rest of the period. The reserve must appear in the balance sheet separately and cannot be distributed while those assets must remain, and the notes to the annual accounts must carry the information paragraph 13 lists, including the allocations, the investments and any other tax benefit or subsidy linked to them, while the holding period runs.
Ownership structures need particular care. A company whose business is leasing assets can use the reserve only where it has no direct or indirect related-party link with the lessee, as defined in article 18(2) of Ley 27/2014 on corporate income tax, and the lease is not a finance lease; leasing real estate counts as a business only in the circumstances of article 27(2) of the personal income tax law. For real estate the company must also meet one of the further conditions the same paragraph lists, the one that fits a resort being that the owner is a tourist company under Ley 7/1995. A property company leasing the resort to an operating company in its own group is related to it in that sense, and cannot use the reserve through that lease.
The rest of the article limits the total benefit. The part of an investment financed with subsidies does not count as investment of the reserve, the reserve cannot be combined for the same assets and expenses with the investment deduction in article 94 of Ley 20/1991 or the corporate tax deductions the article names, and for the categories paragraph 14 identifies the tax saving from the reserve plus any other tax benefit or subsidy granted on the same investment cannot exceed the limits of EU rules on investment aid. If the reserve is used before the holding period ends, invested outside the permitted categories, or any other requirement is breached apart from the accounting and disclosure rules in paragraphs 3 and 13, which carry their own penalties, the amounts that reduced the taxable base are added back in the year of the breach, with late payment interest and without prejudice to penalties.
Why it is worth the trouble
A successfully repositioned Canary resort combines a value-add gain, a year-round tourism market, and a tax regime that rewarded the investment. That is a strong combination, and it is available precisely because the moratorium made new building hard, concentrating the opportunity in transformation. For an investor with the capability to execute the work, the tired old resort is not a problem asset; it is the point of entry.
Montclare structures and operates investments in the Canary Islands, from the ZEC and the RIC to hotel and real estate assets on the ground. Our services are set out on our services page.
This article is informational and does not constitute tax, legal or investment advice. The Canary Islands regimes have specific conditions and change over time; treatment depends on the facts. Each engagement is subject to scope and applicable regulation.