The Editor Speaks: The Value for Money DART/NRA isn’t quite as good as it seemed

I am not surprised the Dart Realty Cayman Ltd (DRCL)/National Roads Authority (NRA) deal isn’t the superlative deal we had been led to believe by ex- premier Mckeeva Bush.

I am not surprised not only because what Bush has said in the past has often been ‘exaggerated’ (and I am being kind with my choice of words), but because the new minority government had gone to great lengths to get more.

They nearly succeeded but pushed just too much and DART backed off.

Even though the minority government had gone to great lengths to say the deal with DART was value for money, when they also try to improve it and delay the release of the value for money report, red flags wave in front of my eyes.

In the actual face value, the long awaited PricewaterhouseCoopers (PwC) Value for Money Report (VfM), does say it is value for money.

The Seven Mile Beach (SMB) hotel alone has a calculated economic benefit of $755M to the Cayman Islands over 20 years and PwC estimate a value to the country of more than $2.4B IF Dart was to proceed with planned additional developments.

It’s a small word “if” but with a HUGE meaning and that is why I had it capitalised.

You see, PwC point out that, except for the proposed SMB hotel (on the site of the former Courtyard Marriott), the deal does not oblige DART to undertake any specific type of development nor does it establish any guidelines as to the nature, timing or scope of future developments.

“…. actual development will depend on market conditions and DRCL’s commercial priorities. As a result of the limited specificity in the NRA Agreement, there are no restrictions which could prevent DRCL from concentrating its resources for the next few years on office and commercial space at Camana Bay and applying the entire $24m Abatements to such development, which arguably could have been viable even without the $24m Abatements” the Report says.

The abatements are a package of duty concessions and its 50% share of the tax dollar from accommodation fees.

“Such an outcome would result in significantly lower economic benefits than those estimated from the hotel/tourism focused projects included in the DRCL Development Plan. Economic benefits to the Cayman Islands could therefore be significantly below those calculated,” the Report says. “PwC believes these shortcomings in the potential application of the $24m Abatement need to be addressed to ensure that the GIG obtains VfM.”

PwC estimated the potential cost of the Hotel Tax Rebate to be up to $63.2M when applied to the various hotel projects included in the DRCL Development Plan for a period up to 2052.

“DRCL has presented the Hotel Tax Rebate as an important consideration in its decision to go forward with the hotel projects included in the DRCL Development Plan. However, PWC believes the following considerations must be taken into account when assessing the VfM provided to the GIG by the Hotel Tax Rebate:

•  DRCL can also claim the Hotel Tax Rebate for any hotel it opens or renovates, including hotels it could build on properties outside of its land parcels adjacent to the WBR (for example at Camana Bay) or if it acquires an existing hotel and undertakes “renovations”.

•  The purpose of the Hotel Tax Rebate is to spur the development of new hotels or the renovation or refurbishment of existing hotels by DRCL. DRCL represented to PwC that it would not likely undertake hotel investment in the Cayman Islands as currently planned without the Hotel tax Rebate.”

Further the Report says:

Given the wide geographical scope and very long period during which the Hotel Tax Rebate is applicable, it is not possible for PwC to judge whether the Hotel Tax Rebate would have a significant impact on a hotel investment decision in the Cayman Islands nor what the likely impact on competitors’ investment decisions would be.

• To PWCs knowledge, a similar rebate on hotel taxes has never been made available by GIG to a developer. Although GIG has in the past negotiated other incentives with hotel developers on a case by case basis, there is clearly a risk that the Hotel Tax Rebate could set a new precedent in the Cayman Islands, which would weaken GIG’s negotiating position with alternative potential hotel investors.

• The potential cost of the Hotel Tax Rebate is highly subjective and very difficult to estimate given the possibility of the hotel tax rate increasing over time, which directly increases the value of the rebate. The recent decision by GIG to increase the hotel tax from 10% to13% effectively increased the cost of the Hotel Tax Rebate to GIG by 30%.

Overall, PwC believes the Hotel Tax Rebate may not, as set out in the NRA Agreement, provide the CIG with VfM because:

• Except for the SMB Hotel, CIG does not know the size, type or location of any hotel developments, which would be eligible for the rebate;

• The rebate could apply to existing hotels in which DRCL would acquire a 51% participation (or perhaps less); and

• Once the details of the Hotel Tax Rebate are made public, owners of existing hotels or other potential investors could make demands for similar rebates, at a cost unknown to CIG.

End

PwC states, “The Hotel Tax Rebate may not provide VfM to the CIG because CIG has little control over its application to either new hotels (of unknown category, size or location) or to existing hotels (without requiring substantial renovations) and because of the unknown impact it might have on other current or future hotel developers and owners.

“The stamp duty rebate provided to Caymanian purchasers of DRCL properties could potentially distort the local real estate market to the disadvantage of competing developers. As such, it is recommended that CIG consider whether any stamp duty concessions to Caymanians should be offered under a wider program, rather than one targeted solely at DRCL properties.

“DRCL will have complete control over the route and other aspects of the new pedestrian and bicycle path which will be the only means for public access to significant parts of West Bay Beach. This control is important for DRCL to be able to carry out its long-term development plans. However, CIG should seek to enhance its control over this public amenity, without encroaching unduly on DRCL’s need for commercial flexibility. A possible approach would be to oblige DRCL to consult with CIG before important changes could be made to the pedestrian and bicycle path.

“There are areas of the NRA Agreement in which the obligations on DRCL remain vague and do not appear to fully reflect both parties understanding of their agreement in principal; most notably:

“New Barkers Road: DRCL has confirmed that it still intends to meet the cost of construction of a new public road in Barkers.  However, under the Second Amendment of the NRA Agreement there is no clear obligation to do so; and

“Sunrise Adult Training Centre: while DRCL has advised that it will meet the cost of providing road access to this land, there is no clear provision in the NRA Agreement for it to do so.”

The Report makes this interesting observation:

“…. this VfM review should have been conducted as part of the initial project appraisal at an early stage in the overall process, rather than at this late stage, and the CIG’s own project appraisal should have been carried out and published for public consultation prior to the procurement stage.”

As for the closure of the West Bay Road, the Report generally has a favourable assessment. It says:

“The closure of a portion of the WBR and the construction of the ETH Extension and the ETH Expansion will provide benefits to the Cayman Islands not fully captured in the estimated economic impacts. Most notably, these road projects will be a major step in the NRA’s plan to make the WBR better adapted for pedestrians and will help to alleviate congestion. The diversion of traffic from the WBR to the ETH Extension is also expected to contribute to the safety and well being of Caymanians, albeit concerns have been raised regarding the social impact of potentially reduced beach access to the public”.

One can only hope that with the third amendment that had nearly been agreed with DART can be renegotiated and included. At the moment it has gone and there is a barb in DART’s Press Release that followed the release of the Report. It said quoting from DART’s Chief Operating officer, Jackie Doak, “Dart Realty confirms it is committed to continuing to fulfill its obligations under the NRA Agreement, which includes work on the Public Beach Park, completion of the ETH Extension to Batabano and continued design, demolition and construction work on the hotel which began in September 2011. Dart Realty looks forward to Government also fulfilling its obligations under the executed NRA Agreement.”

Nothing is ever quite as good as it seems after government has finished banging the drum.