Further to our earlier communication with respect to the performance of the Hotel Units component within the Laguna Tower development, we write by way of confirmation of the review conducted.
As previously communicated, the Hotel Units ran at an operating loss for the calendar year of 2017 and thus with both current trading conditions as well as the likely trading conditions going forward IFA asset Management has explored how the longer term viability of the assets could be secured.
- An exhaustive assessment of costs, revenues and distribution of the same was conducted. Gross revenue has been managed effectively and is therefore unlikely to move the needle substantially towards a positive outcome. The overall costs, whilst always under scrutiny, are in line with those expected to run an asset of this nature and thus would not also greatly impact profitability.
- Market comparisons were made to see if a model can be found which can both fairly and equitably provide for Owners and maintain the financial integrity of the assets. A conclusion has been drawn that the mechanism to secure the longer term viability was a systematic change to the current model.
- From January2018, the overarching terms of the Rental Pool Agreement (the ‘RPA’) shall be amended to incorporate the following changes: –
- Owners will receive 90% of the “Rooms Revenue” as defined within the RPA.
- Prior to distribution of the Owners income an allocation of the operating costs for the Hotel Units will be performed which incorporates: –
- Direct associated running costs such as consumables, laundry, housekeeping and utilities.
- Direct associated costs related to Sales & Marketing and branding (e.g. commissions to agencies).
- Monthly assessment fee in line with existing deductions.
- FF&E (fixtures, fittings & equipment) reserve fund.
- Indirect management, administration and maintenance costs allocated based on the Operator’s assessment of work performed and management effort associated with the Hotel Units.
- A management fee directly related to managing the asset and Operator will be deducted from the Rooms Revenue of 10%
Such costs shall be allocated in keeping with the RPA distribution based on unit type and the resulting net income will be payable to the Owners in keeping with the RPA also. Owners’ room night usage would remain unaffected by the changes and we believe that the model is more favorable to the Owners than the other comparable agreements in the market.
By adjusting the manner in which both costs and income are distributed, IFA Asset Management believes that the longer term financial viability of the assets can be secured. Whilst in the short term, the Owners may see a reduction in returns; should market conditions change for the better, the Owners shall benefit from any increase in profitability that results.
The alternative to seeing this change would be severely detrimental to both Hotel Unit Owners and/or other stakeholders within Laguna Tower. The provisions contained within the RPA in a situation wherein the Hotel Units are no longer economically viable could allow for the termination of the RPA with immediate effect, but the steps we are introducing would avoid this potential outcome.
The ramifications of terminating the RPA under clause 6.2(b) lead to an ultimate reversion of the properties to “single family residential” properties. At the time of launch, requirements to change property usage were less onerous and costly than today, equally it was not envisaged that this provision would likely ever occur.
The termination would lead to a huge burden of costs on the Owners to make any practical changes necessary and one could also not guarantee whether the properties would be accepted for such a usage change. Over and above this, removal of the associative brand identity for Laguna Tower would likely lead to a significant devaluation for Residential owners and Hotel Unit investors alike.
The first returns assessment will be performed prior to the 15th February and returns distribution will occur as is currently the case via bank transfer at that point. Information and answers to FAQs will also appear on the MLT Owners’ website shortly, to answer questions Owners may have with respect to the changes outlined.
On Behalf Of
IFA Hotels & Resorts Asset Management