Case Study

Question 1

What were the terms of the ground lease?

Answer 1

150 Years from PC
c. £530,000 rent

Annual RPI linked rent reviews - 4% & 1% cap and collar

Right to buy back for £1

Question 2

Can you talk me through the franchise agreement?

Answer 2

It was a franchise agreement between the client and IHG hotels

Term of 20 years

5% of rooms revenue in royalties

Marketing - 3.5% of rooms revenue

£360,000 capital contribution for Licensee costs to develop hotel

Can terminate at any time with 24 months notice and a lump sum payment not less than £50,000 per year for 36 months prior.

Question 3

What is the importance of the fact the Lowry had not reached a point of stabilisation?

Answer 3

The hotel would not be trading at a rate expected of a reasonably efficient operator. Therefore, the yield reflects additional risk of the hotel reaching this point.

Question 4

Was the valuation red book compliant?

Answer 4

Although it was for internal purposes and didn’t have to be, I followed the structure of the red book and the valuation was red book compliant

Question 5

What did you notice on external inspection? What was the construction? Materials? Build? Defects?

Answer 5

The property used to be a series of townhouses. It was constructed out of Bath stone and was of stone masonry construction. The development entailed some repair works to the exterior which had already been undertaken upon inspection.

Question 6

What did you notice on the internal inspection?

Answer 6

The site was still undergoing development during the inspection. However, I noted the number of rooms expected to be produced through discussions with the client who also provided me with CGI images of the expected fit out which was to be of a very high standard.

Question 7

What is a cap and collar?

Answer 7

A cap and collard rent review sets a minimum and maximum uplift should the index not grow sufficiently or should it grow too much

Question 8

Talk me through the DCF approach

Answer 8

The DCF approach sums all present and future cash flows and an exit value and discounts them at the required rate of return to produce a net present value.

Question 9

What is a net present value?

Answer 9

A net present value is the sum of all present and future cash flows discounted to present day terms at the required rate of return.

Question 10

When looking at comparables of values per room, did the comparables have similar features/location?

Answer 10

Due to the heterogeneous nature of the upscale hotel market, making like for like comparisons is difficult. However, I used hotels that are considered a similar standard to the completed product in prime regional hotel markets such as Bath, Manchester and Edinburgh.

Question 11

Why is Bath a strong hotel market?

Answer 11

Bath is a popular destination for tourists who want to visit historic features of the city like the roman baths. Therefore there is a lot of tourism that flows into the city making it a strong hotel market.

Question 12

What is the population of Bath?

Answer 12

c. 80,000

Question 13

Why did the hotel represent a good quality regional asset?

Answer 13

The hotel was to be a flagship Hotel Indigo and was going to be fit out to a very high standard. The market in which it was to operate is also a very strong market.

Question 14

What was the tenant’s covenant strength?

Answer 14

The client was going to operate the hotel under the Hotel Indigo brand with a franchise agreement to IHG. The client has a very strong track record of operating many hotels worldwide. I was therefore of the view that it was a strong covernant.

Question 15

What PPE did you use on the inspection?

Answer 15

Hard hat
High vis
Steel toe cap boots

Question 16

What is the main RICS document associated with Inspection?

Answer 16

RICS Surveying Safely 2018

Question 17

What is your firm’s internal procedure for lone working?

Answer 17

We operate a buddy system where you check in and check out of the inspection with a colleague. You must inform the colleague of the time of your inspection and your expected return time and have the appointment in your calendar along with your phone number.

Question 18

What are the current issues in the Hotel market?

Answer 18

COVID-19 is a major issue. The restrictions on travel caused by COVID are having a significant impact on the market and are causing hotels to severely underperform. Due to the recent rise in the number of ground rent transactions, many operators are struggling to meet the requirements of their ground lease terms.

Question 19

What else is in the news about Hotels?

Answer 19

Travelodge CVA. Travelodge have notified landlords that they are unable to meet their rent requirements due to significant under performance.

This has caused yields on Travelodges to soften by approximately 200bps and they have a negative rating on CreditSafe.

Question 20

What are the key variables you consider affect the value of a hotel?

Answer 20

Micro and macro location, quality of hotel, tenure

Question 21

What was the ground rent?

Answer 21

c. £530,000 for a term of 150 years with annual RPI linked rent reviews capped and collared at 4% and 1%.

Question 22

There is a river nearby. Was there a risk of flooding? Did you factor this into your valuation?

Answer 22

There is a river nearby. I conducted a flood risk assessment using the Environmental Agency website. The risk of flooding was very low and therefore it was not a significant factor in determining the value.

Question 23

What percentage of EBITDA did the ground rent reflect?

Answer 23

The ground rent equated to approximately 5% of turnover and 15% of projected EBITDA.

Question 24

What was the FF&E allowance?

Answer 24

4% of revenue and allowed for refurbishment and replacement of major items as and when required.

Question 25

What hotels were in your competitive set?

Answer 25

The competitive set contained other upscale hotels in the Bath market including:

Gainsborough Bath Spa
Hilton Bath City Hotel
Francis Hotel Bath
Macdonald Bath Spa Hotel
Abbey Hotel Bath
The Royal Crescent Hotel

Question 26

The building was undergoing development. Was there any contamination?

Answer 26

During my site inspection I did not notice any contamination. I also conducted a desk top study considering the previous use of the site, local history and planning register and the risk was minimal.

Question 27

What’s the difference between Grade I and Grade II* listed?

Answer 27

Grade I are buildings of exceptional interest

Grade II* are particularly important buildings with more than special interest.

Question 28

What level of PII did you have?

Answer 28

£5m