Ritz owners sticking to their story

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. 

 

2007 valuation 

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. 

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20 COMMENTS

  1. Perhaps the property will once again achieve stupefying valuations in the future, but I wouldn’t bet on it.

    The new owners may have a rough road ahead of them to add capital value, based upon the inability to inflate income and given world wide competition and affinity for lower cost vacations in the region.

    Keep in mind the low cost of financing, what happens when rates return to historical normals?

    The likelihood of getting these deals to perform at higher valuations is diminished and the risk for investors increases.

    If the percieved value of the property was 468 million where were the bidders, the property would have attracted sharks from all over the world.

    Cayman suffers from the bloat of over valuation and ignorance when it comes to the realities and vagaries of world economic influences.

    This tiny island has been blessed with opportunity but will have to work very hard to re-ignite the appetite for investment and capital appreciation.

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  2. Why are the new owner responsible for the custom duty surely this is to be paid out of the 177M received by the administrators.As it a government fee it should be paid first before the money is paid out to the creditors. Now the stamp duty that should be paid by the new owners as just anyone else pay. When will this country learn that this is not a job for the elected politicians but for the civil service to enforce, when we do live will be so much more simple again.

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  3. Fair market value is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market.

    As far as I know there is no market of selling high end hotels the Cayman Islands. In the first place Ritz is the only one and high end luxury hotel without competition in the Cayman Islands. This is one of a kind sale of property in the Cayman Islands therefore no market conditions apply. Therefore fair value of Ritz is determinable based on actual value of land and constructing the building less depreciation and cost to dispose.

    Being creditor turned owner in one person would eliminate gain/loss from intercompany transaction and therefore have no effect as a whole. The risk of understating the fair market value is high.
    Government should review transfer pricing under arm’s length principles.

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  4. There seems to be some confusion here.

    Stamp duty is payable on the foreclosure sale by the new owners. There is no doubt about this and hopefully the government will not be lured by promises, proper or improper, to waive this.

    However stamp duty is actually payable on the price paid or fair market price, whichever is higher.
    So if the Ritz was actually worth more than 177m at the time of sale, more stamp duty could be payable.

    However that 468 m. valuation was in 2007, peak of the market. So a true, today value is closer to 250m.

    The other issue is the back duty owed by the previous owner. Is this simply an unsecured claim or is this a priority claim by the government?
    If an unsecured claim the government will get pennies on the dollar.
    If a prior claim it should have attached to the real estate and ALSO be payable by the new owners.

    Too bad for the other vendors who are going to have to eat losses of some 200m. Hopefully they will be able to stay in business.
    Much of this money could be owed to travel agents world-wide, who might now think twice before booking their clients into the Ritz in Grand Cayman!

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  5. While the small Caymanian business owner cannot get a letter of good standing if they owe 100.00 to the government, the Ritz owners seem to get a tremmendous free pass while owing 6,000,000.00. Who can figure that one out?

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  6. DonQuijote

    Hotel valuations are not limited to this island and the comparison should be made internationally if information is available as hotel investors are rarely limited to a specific country. Your cost approach is frowned upon by the institution that governs valuation methods on this island and would likely lead to a huge over valuation. I believe in the real world the market is always the best judge of value, but hey that’s only my opinion.

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  7. confused,

    You are referring to market value if you consider international information.

    Fair market value is between two parties taking into account the respective advantages or disadvantages that each will gain from the transaction. You cannot compare an apple to banana. Let’s see for example, if there is only one bidder to Ritz for one million because they think hotel will incur losses for the next 5 years and the sale was consummated, do you think one million is the real fair value? In reality the land is still there, the buiding is intact, the neighboring hotels are there, the cost of neighboring hotels’ buildings remain the same. It would be funny to see the cost of ritz land and building at 177 million while the cost of marriot hotel land and building at 200 million, a big joke.

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  8. Well look at the bright side of the whole thing, if it is not paid, no work permits are said not to be granted along with nothing to do with immigration, this may be the turning point for Caymanian to have a chance at empolyment, over 800 empolyees and the caymanians you can count them on one hand.

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  9. You must have a lot of fingers on your one hand, Lady in Red, because there are more than 150 Caymanians working at the Ritz. Have you actually ever gone there to check it out for yourself?
    In any case, the money owed by the company that developed the Ritz is now owed by the Ritz management company, which is the company that gets the permits. You really don’t understand this situation at all.

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  10. DonQuijote

    The big joke here seems to be that you think cost equals value. 200 million for the Marriott, what you been smoking Bobo?! You do know that is sold at the height of the market in 2006 for 44 million?

    What most people seem to be missing here is that the article states that the 2007 valuation assumes the completion of 446 (!) residential golf course units that do not in fact exist. This would make the 468.8 million valuation substantially higher than the true market value in 2007, let alone the value now.

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  11. DonQuijote

    Yes I was referring to the Market Value, this is the value utilised here in Cayman. I have no idea what your Fair Market Value is or where it is utilised but it doesn’t seem to have any relevance in this situation???

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  12. LadyDiana,

    The 200 million cost of marriot is just an example, by pulling the value to international market would mean neighboring hotels cost could be higher than Ritz. Of course you cannot compare Marriot to Ritz and as I said Ritz is one of a kind in Cayman and so market valuation does not exist. My focus is the determination of tax, the use of fair value base as opposed to market value being the purchase price of Ritz. One more example why fair value should be given more weigh, how if after 1 year Ritz change its strategy from high end to value end, let’s say 500 lowered to 120 per room rates per night, would it justify Ritz paying less tax base of 177 million? Therefore market condition depends on business plan but it does not represent the fair value of an asset.

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  13. DonQuijote

    I would stick to tilting at windmills – or at least get yourself a copy of the Stamp Duty Law. Sorry, but your focus on ‘tax’ is incorrect. What is being discussed here is the assessment for Stamp Duty and the basis for this is Market Value. It has nothing to do with Fair Value or any other definition or basis of assessment that you may wish to apply. As for your comment that ‘market valuation does not exist’ – boy, that must be some good stuff you have!

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  14. I have to agreed with LadyDiana and admit I have no clue what DonQuijote is on about but one thing is for sure its not property valuation, which is the issue at hand here. In LaLa land the Ritz is worth a billion because it can be written that way in some tax accounts or on the back of a cigarette packet, in the real world it’s worth what someone will pay for it, which is exactly what happened.

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  15. Confuse and ladydiana,

    The law of supply and demand was not met = when demand is high supply is decreasing, when supply is high demand is decreasing.

    In Ritz case , there is only one supply and the buyer pays for lower amount, see the equation supply low = demand low. Is this a market?

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  16. Yes DonQ I do understand basic economic principles and I am aware that there is a large international market for hotel sales here on planet earth, maybe not on your planet.

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  17. That last post from DonQuijote is a real head scratcher. If no other bidders or potential bidders were willing to bid higher than the sale price why is that not the market price again? If it was the steal that you believe bidders would have been lining up and driven the price higher.

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