On one of the evenings of January 2016, a Dublin businessman by the name of Tom Walsh left the office of an accountancy firm KPMG in a cheerful mood. He became of the 50 people who invested into the construction of the Clarion Liffey Valley hotel situated in west Dublin. Indeed, it was one of his best decisions so far, as it became the largest hotel built during the property boom.
The hotel has four stars and is situated on the edge of the M50; it has 350 bedrooms for its guests, and is claimed to be in the TOP-5 largest hotels of the country.
The complex was constructed in three phases: the core was built with the help of a limited partnership controlled by developer Paddy Kelly and Co Clare deal-maker Sean Lyne. The financial stuff was on AIB and the businessman Bill McCabe. Then a block of 79 hotel suites was built with the support of Paddy Kelly and his brother Liam, and the project was financed by ACC Bank.
The final phase of the hotel was a block of corporate suites. About 50 private investors, including Walsh, bought individual suites in the hotel and corporate blocks. Corporate suites cost €450,000. Like dozens of similar tax-driven schemes prevalent during the boom, investors offset the cost of the suites against their tax bill for a period of seven years.
At the end of the investment period it was envisaged that they would sell their interests back to the hotel promoters, or a third party, at a set price.
The financial crash changed those plans dramatically. The AIB loans were transferred to Nama in late 2010.
In 2011, Nama appointed Kieran Wallace of KPMG as receiver over the core hotel and, through a cross guarantee, to the hotel’s operating company, Kingsoak Taverns.
ACC appointed Martin Ferris as receiver to manage its interest at the hotel.
The disparate group of tax investors were caught in no-man’s-land. Facing con-siderable uncertainty, they banded together as a group to protect their interests. Walsh was elected chairman of an investors’ group, and it hired Simon Coyle of accountant Mazars as well as Philip Lee solicitors as advisers.
What followed were five fraught years, punctuated by rows over rent with receiver Wallace and delicate talks with bankers.
Yet last January, as Walsh left a meeting with Wallace and Ferris at KPMG’s head office, the prospects of an exit from the investment seemed tantalisingly close. The investor strategy, from the outset, was to work with the receivers towards a sale of the hotel. The problem was that the bank loans raised to fund the investor foray at Liffey Valley were all agreed on different terms by local bank managers in six different banks. Over the course of the receivership, three of the banks — Bank of Scotland (Ireland), ACC and Danske — exited the Irish market altogether. Some of the loans were sold to investment funds.
In some instances, bank branches could not find title deeds. Up to half of the corporate suites were owned by syndicates with multiple banking relationships. Yet the group managed to get agreements from the individual banks to deliver clean titles and smooth the path to a sale.
At the January meeting, Walsh said, the two receivers agreed to proceed with a sale of the hotel on a “consensual basis”. There was also agreement, in general terms, on how the proceeds of any sale would be divided. Nama would receive half of the proceeds, while the tax investors would receive about 30%. Rabobank, ACC’s parent, would be entitled to the remainder.
The Clarion had traded successfully through hard times and now was profitable, making more than €5m in 2015. The market for Dublin hotels is buoyant.
The parties did not agree, however, on a valuation of the sprawling hotel. Tom Barrett of Savills, who previously worked for Choice Hotels, which managed the hotel, valued the Clarion at €25m-€30m. Based on other deals, Walsh believed the 358-bedroom hotel would be worth much more, between €60m and €70m.
If Walsh were proved right, and the hotel sold for €70m, investors would receive €350,000 for each corporate suite. From a position of multiple receivership in 2011, this was potentially a favourable result for the investors. Walsh’s optimism has proved to be short-lived. Just two months later, in March 2016, Nama pulled the plug on the sale. The Liffey Valley loans would now be included in Project Tolka, a €1.5bn portfolio of loans connected to Kelly, developer John Flynn and Alanis, a company controlled by the McCormack family.
Walsh and his fellow investors were flabbergasted. “It makes little or no commercial sense,” he said. “Where is the commercial logic to selling a loan, probably at a hefty discount, buried within a €1.5bn portfolio?” It is estimated Nama may have paid €10m for the AIB loan, which has a par or original value of €30m.
“We believe that if the hotel were sold on the open market, Nama would retrieve the par value of the loan, in its entirety. Will it get that price from selling a loan secured on only part of a hotel? I doubt it very much.” By Walsh’s reckoning, the volte-face will end up costing the state between €15m and €20m. Of course, the outcome would be different based on Savills’ valuation.
One hotel expert, contacted by The Sunday Times, pitched the hotel’s worth between the investors’ and Savills’ valuations. The profits were impressive, he said, yet the hotel was in a secondary location, and probably benefitting from a shortage of supply in Dublin city centre. As 5,000 hotel rooms are added in the city in the coming years, occupancy and room rates at secondary located properties such as the Clarion Liffey could come under pressure.
Yet the design of the hotel could mitigate against just such a shift in the market. The corporate suites were built with the possibility of being converted into a block of one-bed apartments. Even more than hotels, the market for apartments is hot.
The expert said the value of the hotel could also be affected by the fact it had been in receivership for five years, and could require investment. The investors are, nevertheless, confident of their valuation.
The investors’ group sought an explanation from Nama as to the reasoning behind the change of mind, and even met portfolio executives who handled the Clarion loan. They refused to give a reason for the change of strategy. The investors applied under the Freedom of Information (FoI) Act for details regarding the decision on the Clarion loans. It was refused. The FoI legislation does not extend to the agency.
The investors are further irked that the Carton House hotel, also backed by Paddy Kelly, has been stripped out of the Project Tolka portfolio. It is now expected to be sold on the open market. A hotel source said that, unlike the situation at Liffey Valley, Carton was stripped out of the loan portfolio as Nama has full control over all the loans secured on the Co Kildare hotel.
A loan sale will not dramatically alter the overall position of the tax investors, nor technically does it change the value of their investment. Nama will simply be replaced as a lender by an investment fund.
Yet Nama’s approach will set back the efforts to get a final resolution to a tricky problem. The investment fund may then sell the loan to a third party and further put back the ultimate sale of the hotel.
Aside from the delay in any sale, the investors have not received any rent for almost two years. A settlement was reached with Wallace, as receiver of Kingsoak, the operating company, over unpaid rent for the period up to December 2014.
As part of the settlement, Wallace also sought to vary permanently the lease terms to reflect a market value rent. The current annual rent on a corporate suite is set at up to €23,000. The investors refused to alter the lease as it would have crystallised a substantial reduction in the value of their investment. The receiver has set aside reserves to meet the rent owed to the investors, yet the money will most likely be paid only ahead of a sale of the hotel.
It all adds to the frustration. One source postulated that, by putting the loan into Project Tolka, Nama was walking away from a complicated asset. It is also jilting the investors. “Nama’s remit is to get the best value for the taxpayer,” said Walsh. “I can’t see how this can be the case.”