The new regime on stamp duty for commercial leases, introduced last December as part of the 2003 budget, has increased the duty payable by tenants dramatically. In the case of a 35-year lease, this increase has been on average tenfold, and has made leases substantially less desirable.
It could be argued that it has made sale-and-leaseback a less attractive financial option for many hoteliers and investors. With the increased costs associated with leases, hotel companies are prepared to pay less rent. This in turn means that an investor is prepared to pay less for the property, thereby reducing the return that the tenant receives for selling the property.
However, it has also opened the way for "sale and management backs". Although such deals have traditionally been less attractive to investors, because of the inherent liabilities to the owner in a management contract structure (such as repairs and employee liability), they do have the benefit of providing better returns to investors. And the management team is not liable to any stamp duty payment at all.
At CB Richard Ellis Hotels, we have seen a number of new deals being structured based on management contracts. And with the advent of good quality asset management, they have become attractive to non-traditional hotel investors, increasing the sale price that can be achieved.
One potential silver lining from this new stamp duty regime is that it will provide a good argument for lower 2005 rating revaluation assessments. Rateable values are based on notional rental values, and hotel rental values are based on what a notional tenant can afford to "bid" to take on the lease. If the notional tenant has a stamp duty liability that has risen tenfold, they will have to bid less, which should be reflected in the rateable value assessment.