Tax relief for the Fairmont Southampton – The Royal Gazette
Karim Alibhai (File photo)
A package of tax incentives should support a loan deal as part of the redevelopment of the Fairmont Southampton, according to the head of the company that owns the hotel.
Karim Alibhai, the director of Gencom, also insisted that the government will not provide a completion guarantee to lenders for around $200 million worth of renovations at the 593-room property.
He said a “very big difference” from the failed Morgan’s Point development, which left the government on the hook for $165 million, was that the Fairmont Southampton scheme was “fully capitalized…with everything funding in place when we start, to complete the project”.
The businessman added that his company has a significant track record and experience in hotel development.
He pointed out that Gencom was issuing a completion guarantee for the project that is underwritten by “prime institutional lenders…who pose a much, much higher risk to the project than the government does at all.”
Mr Alibhai said: “When the word ‘guarantee’ was mentioned, I think there was a lot of confusion – ‘oh my God, if the project isn’t completed, what happens to the government?
“Well, no one, including former members of government, has mentioned that, no, we isolated ourselves and structured ourselves in the smartest way possible, just like the big projects in the United States would be done, where we We have third parties that underwrite, taking the lion’s share of the risk and getting project completion guarantees.
He said there was a financial institution ready to lend from the tax revenue to provide some of the capital needed. He added: “The risk of completion is ours.”
Artist’s impression of the Fairmont Southampton King Room (photograph provided)
Mr. Alibhai, who founded Gencom in Miami in 1987, explained that around the world, levies such as hotel occupancy and payroll taxes generate funds that are usually given to governments.
He added that “regardless of the cash flow or bottom line of the project, that tax revenue comes in every time a dollar is spent on the property, so it’s the safest revenue stream, whether the project succeed or not, that goes to the Government”.
“It is the tax revenue that the government [is] use to entice people to come and develop or spend money on projects on the island,” he explained.
Mr. Alibhai said: “If you look at it from a practical point of view, let’s say if this project were not to open, there are no tax receipts.”
He added that reopening the hotel would create jobs directly and lead to indirect benefits such as business for taxi drivers and restaurants, or increased air travel.
Mr Alibhai said: “From the government’s point of view, not only did it provide immediate benefits to the economy, but in the long term – after the tax revenue they allocated to reimburse us to fund development – all of this continues to go to government forever and a day.”
Although he wants to wait for the government to announce the expected value of the tax revenue insurance, the businessman said he “hopes” it is worth more than $50 million.
Mr Alibhai added that it was “much less” than $100 million.
The warning from the former finance minister
Curtis Dickinson said last month that “the amount and form of government support” for the redevelopment of the Fairmont Southampton were the main reasons for his resignation as finance minister.
He explained that the government drafted a letter of intent in 2019 which included conditions that had to be met by developers before a government guarantee would be issued.
But he added that the conditions were not met and the letter of intent expired on December 31, 2020.
Mr Dickinson said last month that he was generally not in favor of extending concessions for hotel developments beyond the ten-year maximum.
He added that “concessions are essentially the confiscation of future government revenue.”
Mr Dickinson said: “As foreseen in the 2019 Letter of Intent, developers would have benefited from a reduced interest rate on debt on which the government was considering providing a guarantee.
“The combination of interest cost savings and tax benefits could provide developers with significant savings of millions of dollars.
“These projected savings should be quantified for the benefit of the public.
“Any increase in the duration of the concession would result in even greater cash savings and benefits for developers.
“Furthermore, the precedent would be set for similar concessions of concessions for other hotel developments.
“This significantly increases the actual cost of the extension and should be fully understood.”
It’s unclear how long any deal between the government and Westend Properties, a subsidiary of Miami-based investment firm Gencom, and the owners of the Fairmont Southampton would last.
The Fairmont Southampton was acquired by Gencom – which also owns Rosewood Bermuda – in 2019 when the investment company bought Westend Properties, a local entity.
Mr Alibhai said the hotel was “making close to $100 million in revenue” at the time, but added that cash flow was only $2 million, or 2%.
He explained that other resorts in Gencom’s portfolio typically earn 20-33% in “net numbers.”
Mr. Alibhai added: “We expect revenue to increase by at least 50% or $140-150 million once you get through the ramp-up period, which will probably take about three years.”
Where does the money come from
Here is how Gencom says it is funding the Fairmont Southampton project:
55 to 58%: set of institutional senior debt from two lenders
The rest: Shares of five investors, including Gencom, plus tax relief
He explained that an “institutional senior debt package” involved two lenders and would cover between 55 and 58% of the financing for the project.
Mr Alibhai said the rest of the funding was a combination of equity from five investors, including Gencom, as well as “the tax relief plan that the government has, which fills the balance”.
The businessman pointed out that the components of the government package were “very similar” to elements outlined in previous tax relief policies.
He said: “It is clear that the government has provided support to the tourism and hospitality industry in the form of tax breaks and other concessions so obviously we have had to sit down with the government and say, look, as now part of this overall project, here’s what we need.
“So in principle a package has been agreed which still has to go through its legislative process.
“If that is successful, then we have to marry those pieces…together to work as one unit to allow us to restart the development of the project.
“Hopefully in the next 90 days everything can be done and we can start this summer and stay open for 2023.”
Mr Alibhai thanked David Burt, the prime minister and minister responsible for finance and formerly tourism, as well as Marc Telemaque, the cabinet secretary, and others for brokering the package.
He added that Gencom has granted a profit-sharing plan, which is a first for the company in more than 30 years of operation.
Mr Burt said last month that the government will “pledge the proceeds” of the profit-sharing agreement to the Bermuda Trust Fund.
The fund was pledged in the Progressive Labor Party’s 2020 election platform to “benefit economically disadvantaged Bermudians to reduce generational income inequality”.
Mr Alibhai would not say what the expected return for the public purse would be, but said government advisers had conducted their own studies.
He added: “Suffice it to say, that’s a pretty significant number…when you consider it the ratio of any exposure the government might have.”
The businessman confirmed that the amount was to be in the “millions” every year.
He said the profit-sharing element was not part of a 2019 letter of intent between the government and Gencom, which expired at the end of 2020.
Mr Alibhai said: ‘Having this on the table today does, I think, significantly improve the government’s overall package in terms of the benefits that Bermuda and the people of Bermuda will get.’
Mr Alibhai said he believed at least 70% of staff at the Fairmont Southampton were Bermudian before the coronavirus pandemic hit in 2020, which forced the hotel to close early for renovations and triggered 714 layoffs .
He expected the same ratio when more than 800 full-time jobs are created by the reopening and added that training at other Gencom and Fairmont properties overseas will be available for Bermudian staff.
* Check out our coverage tomorrow for more on the planned residential development at the hotel.