The new owners of The Ritz-Carlton, Grand Cayman, are standing by their earlier statements on stamp duty owed despite conflicting assertions by Cayman Islands Premier McKeeva Bush.
RC Cayman Holdings, which purchased the Ritz property at auction 31 October, claims it has no responsibility to pay some $6 million in deferred duty the government alleges it was owed by companies formerly controlled by Ritz developer Michael Ryan. RC Cayman, a subsidiary of United States private equity firm Five Mile Capital Partners, said it never received a reply from the premier to its June proposals on various issues, including stamp duty. Additionally, RC Cayman claims that the US$177.5 million purchase price of the Ritz was agreed upon by the company’s valuation experts and the government’s Valuation Office.
‘The political fray’
RC Cayman’s statement was issued 7 November after Mr. Bush had told the Caymanian Compass that government and the company were discussing the “still outstanding” debt, as well as stamp duty on the transfer of the property to RC Cayman.
On 14 November, Mr. Bush said in the Legislative Assembly that government would continue to demand the $6 million in deferred duty. He said he wrote the new owners on 5 October regarding their June proposals. Additionally, Mr. Bush said the US$177.5 million purchase price was far lower than the US$468 million value assigned by an appraiser in 2007, and that the government’s Senior Valuation Officer Uche Obi had said in his opinion the hotel and property were worth more than US$500 million.
In response to a request for comment from the Compass, the owners’ local attorneys Conyers, Dill & Pearman issued the following statement: “Five Mile Capital Partners LLC has no desire to enter into the political fray by responding to the premier’s address to the Legislative Assembly on 14 November, 2012, but stands by its earlier statements. It also reaffirms its commitment to the improvement of the Cayman Islands and its tourism offering, as well as the welfare of residents through employment at the hotel, and to its policy of complying at all times with the laws of the country.”
According to the 7 November statement, the new Ritz owners intend to pay the full stamp duty on the US$177.5 million property transfer, although they say they have “no legal obligation” to pay the outstanding $6 million nor “any agreement with the government” to assume any unsecured debts owed to government.
Via an unknown source, the Compass received copies of reports performed by property consulting firm BCQS that places the value of the Ritz and associated properties in the region of US$468.8 million, as of January 2007. The value of the hotel resort itself is placed at around US$387 million, calculated according to an income capitalisation approach based on a projected 2009 net profit of about US$21 million, and assuming the completion of 446 golf course residential units (generating additional profits of some US$4.5 million through resort amenities).
Additionally, the value of five parcels of undeveloped land, totalling about 41 acres, is pegged at US$81.8 million, based on the property’s development potential.
Aside from income capitalisation, the valuer uses two other approaches to put the US$387 million figure for the hotel resort into context. Citing capital costs for the entire development to be in the region of US$700 million, the report estimates that the cost to build the hotel was about US$320 million. The report also lists nine recent sales of luxury hotels in the US, Mexico and Italy, calculating an adjusted average sales price of US$1.1 million per room key. That is in line with the US$387 million value of the Ritz, divided by its 365 room keys.
Fair market value
Bould Consulting senior surveyor Michael Treacy said, generally, it would not be surprising to see the value of a property in 2012 plummet from what it was valued at in 2007.
“I must start off by saying that I certainly do not claim to be a specialist in the field of hotel and leisure valuation as I have for the most part of my career kept to commercial and development valuation. I have had no involvement whatsoever in the Ritz Cayman other than maybe valuing individual residential units for purchasers,” he said.
“In terms of a 2007 to a 2012 valuation, I would comment that 2007 was the height of the global economic boom where there was a large amount of finance available and a hunger for investment. Property yields were very sharp and investors and developers were very bullish, backed by much deregulation in the banking system globally. As everyone is aware in 2008 we witnessed the global crash, which resulted in property yields literally halving almost overnight in large commercial centres such as London as finance dried up and banks recalled their loans.
There were commercial buildings in London that in a short space of time were worth less than half their 2007 value,” Mr. Treacy said. While the economy may no longer be in freefall, he said the global property market is “still fragile” and investors are not nearly as optimistic as they were in 2007.
“I would not be surprised to hear that a valuation in 2007 could have halved today, particularly since you pointed out that the 2007 valuation was based on projections of the property boom continuing into 2009.
It is highly likely that the projections included much development work that was later shelved or put on ice such as most of the deck houses and it may have included some of the residential, which I believe was not part of the recent sale. The global recession would have hit the operating profits of the hotel hard and it is highly likely that any projections were way in excess of the actual profits achieved and this coupled with a sharp rise in property yields would have a big impact on value,” he said.
The Ritz property ultimately sold at auction for US$177.5 million, which the owner claims is an appropriate value for the property.
“If the auction was properly advertised and carried out in the normal manner then I would have thought the price achieved would be the market value today.
Any investor would have looked at the performance of the hotel contract and the income received and made an offer according to the current market, which is a far cry from the market in 2007,” Mr. Treacy said.