The investigation by the Office of the Contractor General (OCG) into the proposed sale of the hotel in Whitehouse to the Sandals group raises the issue of how government should go about the business of disposing of assets that it owns. The sale to Gorstew of the hotel given that they have the right of first refusal is not the problem, the issue surrounds the selling price of the hotel.
The selling price that is being proposed is below the actual construction cost of the hotel and in this case, I am looking at the cost excluding the overrun. The hotel is only a couple of years old and the selling price of the hotel is significantly below the construction cost. The reason for this is because the valuation carried out by KPMG reflects a value based upon the earnings potential of the hotel. It is not uncommon to find that a valuation based on future income produces a lower value than the construction cost. This is mainly due to the conservative method used in estimating future revenues. This is especially true now as hotel rooms are being significantly discounted due to the worldwide recession. However, it is not expected that this situation will continue for the foreseeable future and any valuation should thus come up with several sale prices based upon differing room rental rates.
Another problem in valuing hotels is that the revenue for the hotel is usually based upon the rent that a hotel receives from the manager of the hotel. Most hotels have a contract with a specified minimum payment and then a share of the net profits of the operations. However, it is not uncommon to discover that a significant part of the income of the hotel is lost to management fees and contracts for services which are much higher than the cost of providing those services.
For example, the fees paid in respect of managing the hotel may be much higher than the cost of putting in staff to do the job. Many hotel owners thus get very little in terms of a share of the operating profits. In assessing the future income streams then one ought to remove all management fees and any other service costs and use the actual cost of the services in calculating the future net earnings.
Finally, the clause governing the right of first refusal does not negate the need to determine what a willing bidder will pay for the hotel. In fact, the two usually go hand in hand as the property is put up for sale and the best bid selected then the person who has first refusal can decide whether to match the price or not.
It cannot be satisfactory for the taxpayers to foot the bill for the construction of a hotel only to turn around and sell it for less than it cost. In future, the government would be better served by avoiding the construction in the first place.
Tags: Carl Wilson
Carl,
Thanks for the sound reasoning which I hope is read by greater populace not to mention our silent oposition.Silence no doubt due to their own fault in entering/persuing such a transaction in the first place.
A matter that concerns me is the absence of asset retirement obilgation legislation that require hotels/resorts that lap up some of our prime coastline to set aside funds to retore such properties to green vegetation should they cease to operate under intended or a suitable alternative use of the land as per the planning permission that was granted.
First refusal in the Sandals Whitehouse situation should have been linked to the operators delivering on agreed earnings. This would have allowed Government to extract a reasonable portion of its investment. What we have in this instance is a win, BIG win for Gortew by them being allowed to operate the hotel to the level just about covering thier own management fees and depressing FV (future value) by the low earnings, losses. Selling them the hotel using a earnings multiple method will just lead to a BIG win for a inside buyer who can influence current earnings.
The above point in not meant to paint a picture tha this is the case, but rather to state that this is highly probable and thus must be addressed before a non competitve sale to the inside party can be objectively considered.
Regards
This is just what I was looking for. Can I also discuss about this in my web?