They say beauty is in the eye of the beholder, and perhaps that is never truer when the beheld is a rare and expensive piece of property. According to documents provided to The Journal, different people have pegged the value of the Ritz and associated properties at anywhere from US$177.5 million to more than US$500 million from 2007-2013.
While those people were looking at the same buildings and land, for the most part, the estimated values were significantly affected by the timing of the appraisal, estimators’ assumptions, methods and access to information, and perhaps also by the purposes behind the estimations.
It’s not unusual for different people at different times to arrive at different estimations of the value of a piece of property – be it real estate, antiques, artwork, automobiles, baseball cards, etc. It can be especially difficult when the piece of property is extremely rare, limiting recent comparable transactions, or if it is potentially worth a great deal of money, limiting the pool of willing and able buyers.
Typically, wrangling over the value of property ends when a buyer shakes hands with the seller over the final negotiated price.
However, the Ritz is not a typical piece of property, and the sale was not a typical transaction. Although the Ritz was officially auctioned for US$177.5 million on 31 October, since then public officials have been openly sceptical or at least noncommittal about the true market value of the resort. The Lands and Survey Department has been instructed to assess the value of the property for stamp duty purposes.
All the while, the Grand Court of the Cayman Islands is considering legal arguments, pitting the new owner and receivership companies against developer Michael Ryan and companies he still controls.
The Ritz-Carlton Hotel Company of the Cayman Islands Ltd. continues to manage the property according to its existing long-term agreement, so the resort’s ongoing operations have not changed.
In March 2012, secured creditor RC Cayman Holdings appointed Kris Beighton and Keith Blake of KPMG as joint receivers to assume control of the Ritz, which opened in late 2005.
At the time, RC Cayman filed a writ demanding the immediate payment of nearly US$234 million from Ryan’s companies behind the Ritz. RC Cayman is the local subsidiary of US private equity firm Five Mile Capital Partners.
In August, RC Cayman put the Ritz property up for auction, with an initial reserve price of US$240 million. Several weeks before the 31 October auction, the reserve price was lowered to US$177.5 million.
The auction attracted one other potential bidder in addition to RC Cayman, but in the end the secured creditor acquired the Ritz property with a bid equal to the US$177.5 million reserve price.
In mid-November, then-Premier McKeeva Bush said in the Legislative Assembly that the auction price of the Ritz was “artificially low”, citing a US$468 million valuation of the property in 2007, as well as an opinion from the Lands and Survey Department that the hotel property was worth more than US$500 million. Bush said government would continue to demand the repayment of some $6 million in deferred duty obligations allegedly owed by the Ritz receivership companies formerly controlled by Ryan – a debt that the new Ritz owners say they do not owe.
While Bush said he doesn’t believe the fair value of the hotel could have dropped from US$468 million in 2007 to US$177.5 million in 2012, the new owners say the lower more recent figure was calculated by a local firm and OK’d in writing by the government’s Valuation and Estates Office.
Following Bush’s removal from his position as premier, the new government has struck a more reserved tone in relation to the value of the Ritz property and any deferred duty owed.
In January, new Premier Juliana O’Connor-Connolly said Lands and Survey is performing its own internal valuation of the Ritz property, and that the report would then be passed on to Cabinet for the government’s consideration.
Documents obtained by The Journal show the value of the Ritz pegged at different levels over the years.
In January 2007 – near the apex of the real estate boom, local property consulting firm BCQS estimated the value of the Ritz hotel alone at US$387 million. The value of the Ritz plus associated properties was US$468.8 million.
The firm arrived at the US$387 million figure based on projected hotel profits of some US$21 million in 2009, and assuming that completion of 446 units along the golf course would generate some US$4.5 million in additional annual profits.
The 2007 appraisal cites capital costs for the entire Ritz development to be about US$700 million, with the construction cost of the hotel to be about US$320 million.
The documents include a note regarding a purported meeting among Ritz developers, Cabinet and other government representatives in June 2010.
According to the note, the meeting took place in regard to the developers’ proposal to convert the resort property from leasehold to freehold land. The developers said converting the land to freehold would provide government an estimated $375 million in revenue over the 99-year lease term, plus ongoing revenue in perpetuity.
The note corroborates Mr. Bush’s later statement in the Assembly that Lands and Survey’s opinion at the time was that the hotel property should be valued at more than US$500 million.
According to the documents obtained by The Journal, in late September 2012 local property consulting firm Charterland Ltd. valued the Ritz properties at US$181.5 million, with the hotel valued at US$124 million.
The report, which was prepared on behalf of Five Mile, is based on the hotel’s financial accounts from 2007-2011. Calculating the average net operating profit to be about US$9.9 million per year, the valuers divided that by a capitalisation rate of 8 per cent to arrive at a US$124 million value for the hotel.
The valuers chose the capitalisation rate by analysing transactions of other resort and commercial properties, taking into account the usual capitalisation rates for hotels in the US.
The 8 per cent capitalisation rate for Cayman’s Ritz is higher than the 5-6.5 per cent capitalisation rate for US luxury hotels, and is in the range of US ‘mid-rate’ hotels, which have usual capitalisation rates from 7-9 per cent.
“With respect to the subject property, taking into account the general rates for hotel properties and making adjustments to reflect the fact that the subject hotel is considered to be substantially superior to the comparables, but also that the Cayman Islands is considered by hotel investors to be a less stable market than the traditional hotel markets in the US we are of an opinion that a yield in the region of say 8 per cent is appropriate for the subject property,” according to the report.
The documents obtained by the Journal include an email exchange between Charterland and the Lands and Survey Department, where the government appears to agree generally with the estimated value of the hotel.
On 16 October, Charterland wrote, “We therefore note that the agreed Market Value of the hotel property is US$124 million, for the purposes of the assessment of Stamp Duty/Share Transfer Tax, and the Market Value of the subject properties if sold as a whole is US$181.5 million.”
Charterland also proposed deducting US$6.1 million from that total for the value of chattels (i.e. furniture and other movable pieces of property).
Lands and Survey replied 17 October, “In principle we agree with your figure for the hotel itself” – with caveats that government would have to check the value of the chattels and see itemised bank funds.
The documents obtained by the Journal also include a more recent draft valuation of the Ritz properties by BCQS, dated 22 January, 2013. This report pegs the value of the Ritz properties at US$290.1 million, including US$200 million for the hotel.
The second BCQS report is based on “supplied information” regarding net operating income from 2007-2011 and forecasted net operating income for 2012-2020. The valuers calculated an appropriate net operating income of US$12 million per year, divided by a 6 per cent capitalisation rate to arrive at a US$200 million value for the hotel.
BCQS notes that general capitalisation rates for hotels are from 5 to 11 percent, and assign a 6 per cent rate for the Ritz valuation due to factors such as the quality of the hotel, relative affluence of Cayman visitors and prevailing low interest rates.
Besides the value of the hotel itself, a major difference between the Charterland and (draft) BCQS reports are the different values assigned to the 23.8-acre marina development site.
Charterland determined that the marina site is well suited to be developed into a marina, and pegs the value at US$7.43 million based on sales of development sites fronting North Sound.
BCQS, meanwhile, determined that the “highest and best use” of the marina site is develop it into a “10 storey Ritz branded residential development” and pegs the value at US$18.5 million, based on comparable properties that have been sold or are being “actively marketed for sale”.