Sandals Whitehouse

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.