financial restructuring

Principal Hayley Acquisition

The Russell Hotel

The George Hotel

The Palace Hotel

The Royal York Hotel

The Met

Selsdon Park


Hendersonherd approached Principal Hayley in 2009 to explore the creation of ground lease interests from six freehold hotels which previously comprised a September 2006, £290m sale and leaseback transaction. The dynamics of the property and leisure markets, combined with relationship between landlord/tenant and funder/s, provided an optimum environment in order to utilise ground lease creation as an alternative property finance tool.

The 2006 occupational leaseback terms were considered onerous, with the unexpired term providing little incentive to commit long term investment. The landlord faced a significant fall in capital value and over rented occupational terms.

The occupational cost of the hotels exceeded current market levels. The short leasehold nature, provided little incentive to expend capital in order to maintain and upgrade assets.

Principal Hayley was incentivised to reduce the total occupational costs of the hotels, in addition to securing long term control of the assets. Additional funding was required to initiate asset management plans.

The freehold interests, subject to the 2006 leases were reacquired by Principal Hayley in December 2011, for £220m, with an agreed back to back deal with Pramerica UK Ground Lease Fund.

Upon acquisition the existing leasehold interests were terminated and the freehold interests were sold to Pramerica, subject to the creation of the new 175 year ground lease back interests to Principal Hayley, incorporating five yearly uplifts geared to RPI.

Deal Rationale

The total operational cost of the business had to be rebased to reflect a post 2008 economy.

The occupational costs were over rented and would continue to be so, given 2006 lease back structure – any increase in the hotel trade would be eroded by the base rental level and contracted increases, adversely impacting on value of the business.

A fall in investment property values, particularly those that were over rented, presented an opportunity to reacquire the FH interest. Restructuring freehold and leasehold interests resulted in lower operating costs for the operator.

In addition a ground lease structure provided the operator;

Greater certainty of tenure and control;

'Cheap' and available equity via a traditional property structure as a building block of the purchase price;

Ground lease premium/equity available without third party impact to existing management structure;

Ground lease premium/equity is a long term investment with comparatively low hurdle rates.