Ref. Ares(2013)697534 - 15/04/2013
Ref. Ares(2014)69823 - 14/01/2014
Ms. Blanca Rodriquez Galindo
Head of Unit
State-Aid: Cohesion, R&D&I and Enforcement
Regional Aid
European Commission
Competition DG.
9 October 2009
Subject: State Aid N 660/2008 – Ireland – LIP – Hotel Capital
Allowances in respect of the Ritz Carlton, Powerscourt, Co. Wicklow.
Dear Ms. Rodriquez Galindo,
I wish to express my appreciation for the meeting and discussion on
Thursday 2 September 2009 with you and your colleagues. It was useful
and informative. I wish to also acknowledge the subsequent email which
I received from Andras Tari in which he submitted a number of additional
questions seeking clarification /additional information. I trust that this
letter and the Exhibits attached will comprehensively address and serve to
bring clarity to the questions in your email.
We have numbered the various bullet points contained in the three page
document received from your services following our meeting of 3
September 2009 and set out to provide some further background to
structure. The structure chart “Schedule 1” which was included on our
response of 1 April 2009 and attach same as Appendix 1. Following this
general information we then provide specific responses to each of the
questions in numerical order.
We would reiterate our previous comments, that in our view, Carrylane is
a beneficiary of the aid but only to the extent of the benefit conferred on
Carrylane under the buy-back arrangements with the Exhort Co-
ownership which we have previously quantified as being circa €5.2m. As
this figure is below the maximum permitted aid for the Project in NGE
terms of €20. 376m (Ref: Notification Documentation Dec 2008) no
restriction should apply. Furthermore, when one examines the
development component of the Ritz Carlton project we believe that the
Commission can be satisfied that any aid involved has contributed
substantially to the regional development of the Mid East region and can
reasonably conclude that the aid is proportionate to the regional
development benefits and thus compatible with the common market and
arises under an approved scheme.
The attached responses contain business secrets/commercially sensitive
information and should be covered by the obligation of Professional
Secrecy.
Background information relating to questions 1, 2, 4, 5, 6 and 13
Each of the above questions relate to the overall structure of the
transaction and accordingly we set out by way of further background a
detailed explanation of how the project was structured from its inception
right up to hotel opening.
As you will appreciate the project started as a proposal for the
development of a hotel by the Treasury Holdings Group some 15 years
ago.
In order to get from the position where the proposal to develop a hotel
is transformed into a fully built and operational hotel a number of key
aspects had to be undertaken as set out at (a) to (f) below. Throughout
the development phase each of these aspects of the project were
revisited and refined as the transaction progressed.
(a) Acquisition of a site/piece of land on which to construct the hotel
property
Carrylane was established by the Treasury Holdings Group as the
vehicle through which the development would be undertaken.
Carrylane acquired a green field site from Powerscourt Estates (a
corporate entity) on which to construct the hotel on behalf of the
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ultimate owners. This was an arm’s length purchase from an
unconnected third party. The legal manner in which this site
purchase was arranged was by way of the granting of a 10,000 year
lease over the undeveloped site/land to Carrylane Limited. The
consideration payable was an upfront capital sum/premium of
€2.272m and a continuing annual rent of €380k per annum as
adjusted for price inflation.
(b) Obtaining planning permission from the Irish planning authorities
to develop the hotel
Carrylane then set about obtaining planning permission to develop a
hotel on the land and the relevant planning permission was granted
in 1999. While planning permission was being obtained and refined,
Carrylane began evaluating its funding and operational strategy for
the development of the hotel.
(c) Formulating a strategy for the ownership and commercial
operation of the hotel
Carrylane and the Treasury Holdings group of companies are
primarily property developers and investors whereby they construct
property for outright sale to third parties or for retention and letting
to third party tenants. Accordingly the primary intention in relation
to the Powerscourt Hotel was to construct the hotel for sale to third
party owners/investors who would then let the hotel to the Hotel
Operator.
The Group also decided that it would seek a world renowned Hotel
Group to operate the hotel.
(d) Obtaining bank funding to construct the hotel
Carrylane received some funding by way of initial deposits under
the development agreements and lease agreements entered into with
the Exhort Co-ownership and the Suite Owners (discussed further
below). However the remaining balance of the construction and
development budget was funded by bank borrowings drawn down
by Carrylane in its own right as property developer, which it repaid
as and when it received the balance of the lease premiums and
development contract prices due to it.
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(e) Identification of potential owners for the hotel
Given the size of the project, two types of ownership interests were
sold to third party owners/investors.
The first was by way of a legal Co-ownership whereby a significant
portion of the Hotel was developed for by Carrylane on behalf of the
Co-ownership and then leased back to the Hotel Operator by the Co-
ownership at a market rent. This group of owners (the Exhort Co-
ownership) were to take ownership of the hotel for the duration of
the 7 year writing down period of the capital allowances.
The second group of owners were investors who acquired an interest
in their element of the hotel under a 999 year lease with no buy back
arrangements. These individuals are unconnected and not legally
related to each other in any way, but for simplicity they have been
referred to as the Suite Owners.
The Exhort Co-owners acquired their interest in the land on which
the hotel was to be built by way of a 9,999 year agreement for long
lease from Carrylane at an annual rent of €380K per annum with no
upfront capital sum/premium payable. They then entered into a
development agreement with Carrylane whereby Carrylane agreed to
construct their element of the hotel, on the land which they had
leased, for the agreed price of €101.254m. The Co-owners are not
involved in the hotel operations but rather are property
investors/landlords.
The Suite Owners individually obtained their ownership interest in
the land/site by way of a 999 year lease for a fixed upfront capital
sum/premium from Carrylane. This gave them an ownership interest
in the land on which their element of the hotel was to be built. They
then entered into a development agreement with Carrylane whereby
Carrylane agreed to construct their element of the hotel, on that land
for an agreed price. The development price varied depending on the
location and size of hotel suites being built for each individual
investor.
The manner and timing of when the various agreements were
entered into and completed is as follows:
• At the outset, prior to the Hotel being fully developed by
Carrylane, the Co-ownership and each of the Suite Owners
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signed lease agreements to acquire their interest in the
underlying land. At this time they placed a deposit relating to a
portion of the capital sum/premium payable under the leases to
Carrylane.
• The development agreements under which Carrylane undertook
to develop the hotel on behalf of the Exhort Co-
ownership/Suite Owners were signed prior to the development
of the hotel and initial deposits were also paid at that time in
the case of the Suite Owners.
• The balance of the development price and the lease premiums
were paid when the hotel was built and ready for opening at
which time the occupational leases were also granted to
Carrylane in its role as Hotel Operator by the Exhort Co-
ownership and the Suite Owners.
(f) Identification and negotiations with a hotel operator
The typical approach in the hotel industry at the time that this
transaction was structured was for the world renowned hotel brand
names to agree to manage and run hotels on a contract basis without
taking ownership of the underlying property or taking material
trading risk.
Accordingly Treasury Holdings agreed to have a member of its
group act as Hotel Operator. For various legal and administrative
reasons both the seller of the land to Carrylane (i.e. Powerscourt
Estates) and the Ritz-Carlton Hotel Group insisted on Carrylane
being the company that was selected to act as Hotel Operator.
Accordingly, Carrylane as Hotel Operator acquired occupational
leasehold interests in the property from its owners (i.e. the Exhort
Co-ownership and the Suite Owners) and entered into a management
agreement with the Ritz-Carlton Hotel Group whereby the Ritz-
Carlton Hotel Group undertook to manage the hotel on Carrylane’s
behalf.
1. BENEFICIARIES OF THE AID
1. Please provide a step-by-step description of the project from its
inception until the opening of the hotel (i.e. who initiated the project?
was it Carrylane who started building the hotel and sought to involve
5
third party investors to get the necessary financing or did the
investors contract Carrylane to build the hotel on their behalf? Did
the financial contribution of the investors precede the signing of the
investor lease agreements? etc.)
Carrylane was the entity that initiated the overall project, obtained
planning permission to build a hotel and commenced building the
hotel. During that time Carrylane identified a number of third party
investors to take ownership of various aspects of the hotel via the Co-
ownership and Suite Owner categories. These investors acquired
ownership in the underlying land by way of lease agreements (i.e. the
Investor Leases) and engaged Carrylane to build the hotel on their
behalf by way of development agreements.
On signing their respective investor leases and development agreements
with Carrylane, a small amount of funds were introduced as deposits by
the various investors as a financial contribution to the project. However
the majority of funds due under the leases and the development
agreements were paid when the building work was complete and the hotel
ready for opening. Accordingly Carrylane funded the remaining cost of
developing the hotel from its own bank borrowings. This is the standard
development structure used in Ireland.
2. It appears that some of the beneficiaries were involved from the
outset and contributed towards the construction of the hotel whereas
other investors stepped in at a later stage and acquired ownership in
the hotel. In this respect, do the eligible costs specified by the Irish
authorities refer to the construction costs or the costs of acquiring
the ownership (the two are not necessarily the same). Please indicate
the figures for construction costs, costs of acquiring ownership and
the eligible costs.
Apart from Ilesca Limited and a small number of Suite Owners, the
Exhort Co-ownership and all of the other Suite Owners entered into
their investor lease agreements and development agreements in
advance of the hotel being fully built. The Co-ownership and the Suite
Owners contributed their deposits at the outset with the balance
payable on completion of the hotel. Carrylane was able to use the
signed development agreements as security for bank finance to fund
the construction/development of the hotel.
Ilesca Limited and the other Suite Owners acquired their interest in the
property at a time when the hotel was fully built and within 12 months
6
of the hotel opening (i.e. the then deadline by which they had to
acquire an interest in the property from Carrylane under Irish tax law).
In all instances the Total Amounts Paid by the various investors are
made up of (i) the price paid under the development agreements
entered into with Carrylane to build the hotel on their behalf, and (ii)
the upfront premiums paid to Carrylane under the Investor Leases. A
formula set out in Irish tax law which excludes non qualifying items
(such as site cost) from qualifying amount is then applied to the Total
Amount Paid figure to arrive at the amount qualifying for hotel capital
allowances before and after the 75% restriction for 2007, this is
referred to as the Eligible Cost/Expenditure. The figures for each
investor group are summarised in the table below.
Investor
Total Amounts
Eligible
Eligible
Group
Paid*
Expenditure**
Expenditure
(before 75% restriction)
(after 75% restriction)
Exhort €101,254,000 €95,305,084 €86,667,413
Suite
€87,909,314 €83,557,979 €75,984,952
Owners
Ilesca €35,245,000 €33,497,619 €30,464,299
Total €224,408,314
€212,360,683 €193,116,664
* Total Amounts Paid = development agreement price plus lease
premium
** This is the figure before the 75% restriction for 2007
We attach in Appendix 4 further details of the formula set out in Irish
tax law for determining Eligible Expenditure followed by detailed
calculations for each group outlining how the above figures are arrived
at.
The formula for calculating eligible expenditure for each of the
Investors is the same regardless of whether they acquired their interest
in the hotel before or after the hotel was fully constructed. The
calculation of eligible costs is also the same for individuals and
corporate entities.
3. Did the price of acquiring ownership by the Investors potentially take
into account the fact that the Investors will be eligible for the capital
allowance (i.e. did this price contain a premium through which part
of the benefit resulting from the capital allowance was transferred to
Carrylane) or did it simply cover the construction costs?
7
Carrylane priced the sale of the various elements of the hotel with a
view to making a reasonable commercial return on the costs it incurred
in developing the hotel. The only situation in which the benefit of the
capital allowance is clearly and expressly shared arises from the buy-
back arrangements entered into with the Exhort Co-ownership. Whilst
the Suite Owners would have been aware of the availability of capital
allowances, they acquired their hotel suites primarily for capital
appreciation over a long term horizon. The Suite Owners are not and
never have been a party to any buy back arrangements, they have they
received any warranties in respect of the availability of the allowances
and accordingly were allowances to be restricted or disallowed in
relation to the hotel there is no price adjustment for the Suite Owners.
Carrylane’s total cost of developing the entire hotel including its
financing costs amounted to €189.8m including the cost of the unsold
suites transferred to Ilesca of €35.245m. Carrylane’s revenue to date
from the sale of various aspects of the completed hotel amounts to
€204.2, including €35.245m from the sale of unsold hotel suites to
Ilesca Limited (see further comments on the unsold hotel suites held by
Ilesca Limited at questions 15 below). This equates to a profit of circa
€14.4m or circa 7% assuming third party sales of €35.245m are
actually achieved. The price payable under the development
agreements was not dependent on the actual capital allowances
granted.
A typical development profit range on such a development where
capital allowances are not present would be in the region of 10-20%.
As can be seen from the above figures, the percentage return on the
current transaction is well within this range and is supportive of the
fact that Carrylane did not command a premium from the Investors but
rather simply earned a normal/reasonable profit margin on its
development activities. Accordingly, while the availability of capital
allowances may have facilitated the marketing and sale of the hotel
suites, the suggestion that the development price paid by the Investors
contained a premium due to the availability of capital allowances is not
supported by the development profit margin earned.
Therefore, in our view no such premium is present in the current case.
4. As not all the Investors were present at the time the investment
started back in 2005, who covered the remaining part of the
construction costs? Was it Carrylane?
8
As explained in further detail above, the vast majority of Investors
signed up for the project during 2005 and 2006 and paid a small
amount of a deposit under their lease agreements and development
agreements as appropriate. The balance of the cost of developing the
hotel was funded by bank debt drawn down by Carrylane (supported
by the signed Investor development agreements and leases). As and
when Carrylane received the balance of monies due to it under the
various lease agreements and development contracts (when the hotel
was fully built and ready for opening), it used those funds to repay its
bank debt.
5. In their draft reply of 25 August 2009 the Irish authorities indicated
that Carrylane agreed to construct the hotel on behalf of the
Investors on trading account as a property developer and not for its
own use and retention on capital account as a hotel operator. In case
the Investors ordered the construction of the hotel and paid for the
construction (thus becoming the owners), why was there a need for
the long-term (999 years) investor leases between Carrylane and the
Investors (in which Carrylane seems to act as the owner of the
Hotel)?
Ownership of the land on which the hotel was built and the actual hotel
building are two separate matters of expenditure which together make
up the investors overall interest in their respective elements of the fully
developed hotel. In order for the investors to acquire an ownership
interest in the land they had to take a sub lease (the investor leases) of
the land from Carrylane who itself had taken original ownership of the
entire land/site under its 10,000 year head lease from Powerscourt
Estates.
This is how ownership of land is structured in Ireland where there are a
number of investors taking ownership of the land.
6. In what way are the investor lease agreements related to the
expenditure incurred by the investors when contributing towards the
construction/acquiring ownership in the hotel? What is the reason
for the extremely low figures indicated in these agreements (10 €
mentioned in Exhibit B and C of the reply of 1 April 2009). Are there
separate agreements in place between Carrylane and the Investors
specifying all the expenditure the individual Investors made
(indicated as eligible expenditure by Ireland)?
9
The investor leases are the agreements by which the Investors acquired
their interest in the land on which the hotel was eventually built. The
price paid for land does not qualify for hotel capital allowances. The
actual development of the hotel building is paid for under the terms of
the development agreements with Carrylane and the owners/investors.
The majority of this figure qualifies as eligible expenditure (See
summary table in response to question two above).
Exhort Co-ownership:
The Exhort Co-ownership, entered into a development agreement with
Carrylane for the development of its element of the hotel with the
development price being €101.254m. As the Co-ownership was not
acquiring outright ownership of the hotel they did not pay an upfront
capital sum/premium under its investor lease from Carrylane but rather
agreed to pay an annual rent of €380,000 per annum.
The €10 figure in Exhibit B arises from the way in which the leasehold
interest in the land was sold by Carrylane to the Co-ownership under
Irish law. Carrylane sold the interest to the Co-ownership by way of a
contract for €10 attaching the lease agreement under which the rent of
€380K per annum becomes due.
In summary therefore the Co-ownership acquired its interest in the land
from Carrylane for an annual rent of €380K per annum (plus the €10
upfront amount) and paid €101.254m to Carrylane who developed the
hotel property on behalf of the Co-ownership on the land. It is the price
payable under the development agreement that represents the Eligible
Costs for hotel capital allowance purposes.
Suite Owners:
In the case of the Suite Owners who took outright ownership of their
hotel suites, they paid an upfront capital sum/premium plus a nominal
annual rent thereafter of €10 p.a. to Carrylane to acquire their
ownership interest in the land (Exhibit C). The vast majority of the
overall price paid for their element of the hotel was paid under the
development agreements entered into with Carrylane.
By way of example: for one individual Suite Owner, the lease
agreement over the land in question provided for an upfront premium
of €18,285 plus an annual rent of €10 per annum for each year
thereafter. The €18,285 premium is that individual Suite Owner’s
share of the overall premium of €2.272m. The same Suite Owner also
10
entered into a development agreement with Carrylane whereby it
agreed to pay €703,130 to Carrylane to develop the investor’s hotel
suite on the land. A similar approach applied for all of the Suite
Owners.
As set out in further detail in Appendix 4 a formula based on Irish tax
law is the applied to the total price payable by the Suite Owner (i.e.
€721,415 in the above example) to arrive at the Eligible Cost for hotel
capital allowance purposes. Not all of the total price paid will qualify
for hotel capital allowances as can be seen from the examples in
Appendix 4.
7. Please specify how the rents to be paid by the Investors on the basis
of the long term investor lease agreements are established. How high
are these rents? Are they market conform? Why is there a need for
the Investor to pay this rent in light of the fact that they already
contributed significant sums to construct/acquire ownership in the
hotel?
The rents payable under the investor leases are determined by the rents
which Carrylane must pay to the original owner of the land,
Powerscourt Estates, under the Head Lease entered into between
Carrylane and Powerscourt Estates. The rents payable relate only to
the Investors interest in the underlying land on which the hotel was
built. Such rental payments do not relate to, and are separate from, the
development price payable to Carrylane for the
construction/development of the physical hotel property on behalf of
the investors.
Each time Carrylane sold on an interest in this land/site to investors
(via the investor leases) it charged either an annual rent or an upfront
capital sum/premium to the Investors equivalent to its own obligations
under the Head Lease with Powerscourt Estates. These rents
effectively flow through Carrylane and up to Powerscourt Estates
under the Head Lease.
Exhort Co-ownership:
As set out in more detail in response to question 6, the Exhort Co-
ownership did not pay an upfront capital sum/premium for its interest
in the land. Instead under the terms of its Investor lease it agreed to pay
an annual rent of €380K per annum (Exhibit B Clause 2 of Investor
Lease). The Exhort Co-ownership was required to pay these amounts
11
in order to acquire an interest in the land on which the hotel property
was to be built. The sum of €101.254m was paid for the physical
construction/development of the hotel property and not the underlying
land.
Suite Owners:
As set out in more detail in response to question 6, the Suite Owners
acquired their ownership interest in the land by paying an upfront
capital sum/premium under their investor leases plus a nominal annual
rent thereafter of €10 per annum. The total upfront premiums payable
by all of the Suite Owners for their interest in the land amounted to
€2.272m. The appropriate portion of this lease premium was inserted
in each individual investor lease at Clause 2 of Exhibit C. The Suite
Owners were required to pay these amounts in order to acquire an
interest in the land on which the hotel property was to be built. The
sums paid under their development agreements with Carrylane were
for the physical construction / development of the hotel property and
not the underlying land.
8. Are the terms of the occupational leases (by which the Invertors lease
the hotel back to Carrylane as hotel operator) market conform?
Ireland indicated that the rents the Suite Investors receive are based
on market yields for commercial property based on the Investors’ net
acquisition costs of the property for the first 7 years and thereafter
based on arm’s length room revenue. Please explain how these rents
are established for the first seven years and what ensures that they
are based on market yields. Please also explain why there is a
different arrangement for the years following the seventh year and
whether this could also be considered market practice.
Please provide a detailed explanation allowing to establish that the
rents are market conform. In fact, one of the channels through
which the benefit resulting from the capital allowance can be passed
on to Carrylane is a reduced rent offered to Carrylane.
In our view the terms of the occupational leases entered into by the
Suite Owners are considered to be “market conform”. The Suite
Owners have granted occupational leases to Carrylane (as hotel
operator) for a term of at least 45 years with an option to terminate
after 25 years and every 10 years thereafter. Occupational leases of
such length and with the associated break clauses would not be
uncommon in the Irish market.
12
The intention was to grant a lease with rent linked to net revenue from
the hotel. However it is generally accepted that all new hotels take
some time to stabilise in terms of their trading performance, and that
luxury resort hotels can take longer again. Therefore rather than have
rent linked to net revenue in the early years, the 3% yield was to ensure
a minimum return for investors for the first 7 years, so as to reduce the
risk of a reduced return due to pre-stabilisation losses which would
have made the hotel suites less attractive to the potential investors.
Accordingly, for the first 7 years the rent is payable at a yield of just
under 3% on the total amounts paid by the Suite Owners (i.e. lease
premium under investor lease plus development price under
development agreement with Carrylane). For example using the sample
hotel suite referred to in response to question 6 above the annual rent in
years 1 to 7 is €21,475 based on a total price paid of €721,415 (18,285
+ €703,130).
Thereafter the investors rent is completely dependent on the net
revenue derived from the hotel and accordingly carries the potential for
the rent in year 8 and onwards to exceed the rent payable during the
first 7 years as it will be based on the net revenue generated from the
hotel suites. As the rent payable for 38 years out of the 45 year
occupational lease term is completely dependent on room based
revenue which in turn is driven by market forces, then in our view, the
rents payable are clearly market driven and hence are “market
conform”.
9. How are the rents to be paid by Carrylane to the Exhort Co-
ownership established? Can these rents also be considered market
conform?
Due to the existence of the buy-back arrangements in place between
Carrylane and the Exhort Co-ownership, the rent payments due from
Carrylane as occupational tenant to the Exhort Co-ownership under the
occupational lease differ from those payable by Carrylane to the Suite
Owners.
Under the terms of the buy-back arrangements Treasury Holdings has
agreed to buy back the Exhort Co-ownership’s hotel property for circa
€80m plus other related costs. The €80m figure relates to the Exhort
Co-ownership’s bank borrowing used to fund the development price
payable to Carrylane for constructing/developing the hotel property.
13
As Carrylane will pay a buy back price sufficient to discharge the
capital borrowings of the Exhort Co-ownership, the rent charged to
Carrylane is such that it is sufficient to meet (i) the Exhort Co-
ownership’s interest obligations under its €80m loan facility i.e.
€1.941m (Exhibit F Schedule 7), and (ii) the obligations of the Exhort
Co-ownership under its Investor Lease from Carrylane i.e. €380K per
annum (Exhibit F Schedule 7 and Exhibit B Clause 2 of Investor
Lease).
Such rental arrangements are a typical feature of transactions which are
structured with buy-back arrangements and would be considered
“market conform” in Ireland. The rental yield on the Exhort element of
the transaction equates to 2.3% (i.e. €1.941m + €380K/€101.254m).
The difference in rental yields between the Suite Owners and Exhort is
due to the different characteristics associated with the two groups of
investors. In particular the fact that the Suite Owners have acquired
outright ownership, have no buy-back arrangements and have received
no warranty in respect of the level of qualifying expenditure.
As set out at the start of this note, we accept that Carrylane is a
beneficiary of the aid but only to the extent of the benefit conferred on
Carrylane under the buy-back arrangements with the Exhort Co-
ownership which we have previously quantified as being circa €5.2m.
10.
When calculating the advantage for Carrylane resulting from the
buy-back agreement with the Exhort Co-ownership, the Irish
authorities specified the value of the capital allowance foregone to be
€ 86.6m spent by Corporation tax rate of 12.5 % i.e. €10.8m. What
does the figure of € 86.6m refer to ? (it does not correspond to the
€101m paid by the Exhort Co-ownership to purchase their property
from Carrylane nor to the € 80m that Treasury Holding will have to
pay to buy it back)
The figure of €101.254m relates to the development price payable by
the Exhort Co-ownership to Carrylane for the development of their
aspect of the hotel. This figure is then reduced by reference to
amounts that do not qualify for hotel capital allowances under Irish
Law and to take account of the fact that only 75% of the underlying
expenditure in 2007 qualifies for capital allowance purposes.
14
The portion of the €101.254m development price qualifying for hotel
capital allowances before applying the 2007 restriction is €95.305m
(see table in response to question two above). When the 75%
restriction is applied to expenditure incurred in 2007, one arrives at a
time apportioned overall qualifying percentage of 90.9% which when
applied to €95.305m gives the final qualifying figure of €86.6m.
Appendix 4 contains further notes and calculations setting out exactly
how the above figures are arrived at.
The €80m simply relates to the fact that the Exhort Co-0wnership
funded the development price payable to Carrylane by way of bank
borrowings of €80m and own funds introduced of €21m.
11.
Why is such buy-back agreement not in place with the other
Investors?
The buy-back agreement is not in place with other investors (i.e. the
Suite Owners) on the basis that they have acquired an outright
ownership interest in the land on which their hotel suites were built via
their 999 year lease agreements. These investors have opted to retain
the hotel suites as property investments for the long term rather than
just for the 7 year duration of the hotel capital allowances.
The Suite Owners are the sole beneficiaries of the respective
allowances and they bear the commercial risks associated with the
hotel as the rents which they will receive under the occupational leases
will for the majority of the 45 year term be linked directly to the
Hotel’s performance. Furthermore unlike the Exhort Co-ownership,
Carrylane has not in any way warranted or underwritten the amount of
capital allowances which will be available in respect of the Hotel
suites. However Carrylane has done so for the Exhort Co-ownership
and is on risk for that warranty.
12.
Some of the lease contracts (Exhibit B and E of the reply of 1
April 2009) refer to 'Ritz Hotel Limited (now Carrylane Limited)'.
What is the reason for this? Is/Has there been a connection between
the two companies? Is Carrylane linked to the Ritz-Carlton Hotel
Company in any way?
There is no legal connection between Ritz Hotel Limited (now
Carrylane Limited) and the Ritz-Carlton Hotel Company. The only
15
connection between the two companies is the fact that they have
entered into an arm’s length operating agreement (Exhibit E) under
which Carrylane has hired the Ritz-Carlton Hotel Group to manage the
Powerscourt Hotel under the Ritz-Carlton brand on behalf of
Carrylane.
Carrylane Limited was originally established as Ritz Hotel Limited on
the 7 April 1995 some 14 years ago. The use of the name Ritz Hotel
was chosen in anticipation of either the Ritz Carlton or the Ritz Hotel
operating the hotel and so the Treasury Holdings Group wanted to
protect the use/ownership of the name from an early date. At that time
no discussions had been entered into with the Ritz-Carlton Hotel
Group.
Matters progressed over the next number of years and the Ritz-Carlton
Hotel Group was selected as the hotel manager by the Treasury
Holdings Group. At that time the Ritz-Carlton Hotel Group insisted on
the name of the company being changed to ensure it was clear that
there was no connection between the Ritz-Carlton Hotel Group and
Ritz Hotel Limited. With effect from 21 July 2005 Ritz Hotel Limited
was renamed Carrylane Limited.
13.
Several of the agreements submitted on 1 April 2009 mention the
Head Lease, i.e. a lease dated 16 July 2007 between Powerscourt
Estates and Carrylane limited regarding the Hotel. Exhibit B
provides that the yearly rent to be paid by the Exhort Co-ownership
to Carrylane is the annual rent reserved from time to time by the
Head Lease. Exhibit F also defines the rent to be paid by Carrylane
to Exhort in the frame of the occupational lease as the rent payable
under and reserved by the head lease. Please explain the purpose of
the Head Lease and the way it is related to the other lease agreements
between Carrylane and the Investors.
As referred to under point (a) above, the Head Lease was the legal
agreement by virtue of which Carrylane acquired the land on which the
hotel was to be built. Carrylane then granted subleases (i.e. the
investor leases) of the land out of its leasehold interest to the Exhort
Co-ownership and each of the Suite Owners.
In the case of the Suite Owners they paid an initial premium for their
investor lease from Carrylane who in turn passed it on to the original
owners of the site, Powerscourt Estates under the terms of the Head
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Lease, thereafter only a nominal €10 rent is payable per annum by the
Suite Owners.
In the case of the Exhort Co-ownership, rather than paying a capital
sum upfront, an annual rent of €380k is payable by Exhort Co-
ownership to Carrylane under their Investor Lease which is then passed
on to Powerscourt Estates by Carrylane under the terms of the Head
Lease.
14.
Ireland specified that Carrylane has entered into a management
agreement with Ritz-Carlton Hotel Company employing Ritz-Carlton
as hotel manager. It was indicated that Ritz-Carlton is paid an arm’s
length fee for its management operations. Could you provide more
details about this fee? How is it established and why can it be
considered arms length? Is it a fixed fee or performance related
remuneration?
The Ritz-Carlton Hotel Group was hired by Carrylane to provide hotel
management and operational services to Carrylane and has no
ownership interest in the hotel. The fee arrangements are arm’s length
in nature as they were negotiated between Carrylane and the Ritz-
Carlton Hotel Group as two independent parties.
A copy of the Operating Agreement was submitted as Exhibit E in our
submission of 1 April 2009. 1 The fee arrangements are set out in
clause 6.2 of Exhibit E and involve a number of component parts
which as set out below, are based on fixed percentage of gross
revenues:
- a Base Royalty Fee of 1.6% of Gross Revenue (as defined in the
agreement)
- a Management Fee of 0.4% of Gross Revenue (as defined in the
agreement)
- a Marketing Fee of 1.0% of Gross Revenue (as defined in the
agreement)
- an Incentive Royalty is also payable by reference to certain levels of
profitability which have not as yet been met.
2. AMOUNT AND INTENSITY OF THE AID
1 The Agreement contains business secrets/commercially sensitive information and should be covered
by the obligation of Professional Secrecy.
17
15.
Ireland also included into the eligible costs and the aid amount
the Suites that were temporarily acquired by Ilesca Limited. This
company is a 100% subsidiary of Treasury Holdings (similarly to
Carrylane) and will not claim capital allowance for its investment.
Ilesca Ltd hoped to identify a number of other third party investors
who would acquire ownership of the unsold suites from it, however
in the current economic environment it has not been possible to
achieve this. Ireland claims that "Ilesca Ltd was included in the
Notification documentation so as to provide the full picture to the
Commission and to avoid the need to revisit the matter in the event
that new third party Investors are sourced to acquire the unsold
suites from Ilesca Ltd and claim the capital allowances in the
future". However, Ireland also specified that the underlying legal
basis deems Investors to have incurred eligible expenditure on the
construction of a new hotel if they acquire the suites within 12
months of the hotel first coming into use. As the hotel opened for
business in October 2007, no further investor seems to be able to
acquire the right to the capital allowance. Thus it seems that the part
currently held by Ilesca cannot any more benefit from the capital
allowance. Please confirm this
Under Irish tax law once the hotel property is sold by the developer
(Carrylane) within 12 months of first use (i.e. by 30 September 2008),
then capital allowances are available to Ilesca or any subsequent
purchaser of the hotel suites from Ilesca.
In the context of the current notification we have confirmed that it is
not Ilesca’s intention to claim capital allowances itself, however, the
hotel suites in question were transferred to Ilesca with a view to
protecting the availability of allowances in the event that Ilesca was
able to sell the hotel suites to third party purchasers in the market.
In such instances the third party purchasers would under Irish Law, be
entitled to claim the capital allowances in respect of the hotel suites
acquired from Ilesca. For this reason the Ilesca hotel suites were
included in the notification. While the Ilesca hotel suites can still
qualify for capital allowances if sold to a third party purchaser, the
amount of qualifying expenditure for capital allowances purposes is
forever restricted by reference to the price which Ilesca paid for the
hotel suites i.e. €33,497,619 (before restriction for 2007 spend).
Appendix 4 contains further notes and calculations setting out exactly
how the above figure is arrived at.
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16.
As the form of aid is accelerated depreciation, the aid element
needs to be calculated. Ireland used the highest possible aid intensity
of 12.5 % determined under the approved scheme N 832/2000
(extended by N 232/2006) to calculate the aid element. However, this
intensity only applies to beneficiaries subject to personal income tax2.
Calculated this way, the aid element is higher than the maximum
that can be allowed in the region concerned under the Regional aid
guidelines 1999-2006 and the Multisectoral Framework 2002. Since
some of the beneficiaries, however, are subject to corporate income
tax, the actual aid element might be lower.
Ireland is invited to resubmit the table in p. 1 of the draft reply of 25
August 2009 with a breakdown of expenditure incurred by the three
groups of beneficiaries showing separately expenditure made by
beneficiaries subject to personal income tax and those subject to
corporate income tax in order to calculate the aid element.
We attach as Appendix 2 a revised table 1 from the draft reply of 25
August 2009 breaking out the expenditure incurred by the three
beneficiary groups namely the Exhort Co-Ownership, the Suite Owners
and Ilesca showing the portion of expenditure incurred by individuals
and corporates within each group.
We have also included revised working based on the tax rates and
reference rates applicable in 2005 for each of the two groups which
demonstrates in each case that the eligible expenditure in question is
below the maximum permitted aid for large investment projects.
3. MARKET ANALYSIS
17.
In order to substantiate Ireland's position that the relevant
geographic market in this case should be the EEA, please explain
what the main attraction of the area is, capable of drawing visitors
from all over the EEA (in the Atlantica case referred to by Ireland,
for instance, there was a theme park)
Based on our analysis of the origin of hotel visitors at the hotel for
2008 and for 2009 (up to mid September) we propose that for the
2
P. 29 of the decision in the case N 832/2000 indicates that the aid intensity depends on certain
parameters such as the corporate and personal tax rates.
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purposes of this notification the relevant geographical market should
be Ireland. Essentially this contention rests on the fact that almost 60%
of the hotel guests at the hotel in 2009 originated in Ireland, while the
corresponding proportion from the rest of the EEA was circa 19% (see
appendix 3). It should be noted however that the Irish authorities are of
the view, that for the purposes of marketing and sales promotion of the
hotel generally, the EEA and indeed the global market are the relevant
geographical market. However, for reasons chiefly arising from the
heterogeneity of hotel classification standards and criteria across EEA
Member States and the lack, therefore, of objective standardised data
on hotel accommodation, it is considered that for practical reasons for
the purposes of this notification that the relevant geographical market
should be Ireland.
18.
Please provide information on the country of origin of the guests
since the opening of the hotel in 2007 and their percentage share in
the total.
Appendix 3 contains the percentage allocation of guests from Ireland,
the EEA, the Americas/Canada and the rest of the world for the
calendar year 2008 and the calendar year 2009 from 1 January 2009 to
10 September 2009.
19.
Please provide more detail about Treasury Holdings being the
passive landlord of two hotels in Dublin. What does passive landlord
mean? Which are the hotels in question?
As set out in our draft response of 25 August 2009, the Treasury
Holdings Group is not involved in the operation of any hotels other
than Powerscourt Hotel. For completeness we highlighted the fact that
as landlord Treasury Holdings or members of its group own two
properties as landlord which is rented out to tenants who carry on hotel
operations in those properties.
The term passive landlord refers to the fact that Treasury Holdings
simply owns the property, receives a rent from the occupant (i.e. the
hotel operators) and is not connected or involved in any way with the
hotel operations carried out on the premises.
The hotels in question are the Westin Hotel, Westmoreland Street,
Dublin 2 and the Schoolhouse Hotel, No 2-8 Northumberland Road,
Ballsbridge, Dublin 4.
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20.
Regarding the question of the relevant product market, it seems
that the data provided by Ireland include all types of accommodation.
However, the Commission services consider at this stage that not all
hotels in the EEA/Ireland are a real substitute. According to the
hotel website, the Ritz-Carlton Powerscourt is a 'luxury hotel
showcasing Palladian-style architecture and offering guests a host of
amenities. Two championship-calibre golf courses on the grounds, a
30,000-square-foot luxury spa and a Gordon Ramsay signature
restaurant are among this Ireland luxury hotel’s distinctive
attractions.' Thus Ritz-Carlton Powerscourt is arguably best suited
for guests looking for remoteness and proximity to nature and
specific amenities rather than city travellers.
In light of this, please provide arguments as to which types of hotel
could be considered close substitutes for Ritz-Carlton Powerscourt
and submit new data enabling the calculation of market share and
capacity increase pursuant to p. 24 (a) and (b) of the Multisectoral
Framework 2002 on this possibly narrower market.
The point that not all hotels and similar establishments in the
EEA/Ireland are a real substitute is accepted. On the basis of an
analysis of national hotel classification criteria it is our view that 4 and
5 star hotels combined form the relevant product market. The
contention that the relevant product market encompasses 4 and 5 star
hotels is based on the premise that there exists a high degree of
substitutability within this segment of the tourism market. Switching
costs are low or negligible should customers choose to react to price
increases on an individual hotel level or even national or regional hotel
level by the use of an alternative destinations or alternative class of
hotel accommodation. This ease of switching has been facilitated in
recent years by an absolute and relative decrease in air travel costs
through the increased market share of low cost carriers. The increased
penetration of internet use in the hotel sector either as a means of
advertising or as a means of booking accommodation has increased
customer power. Ease of access to market information on relative
accommodation prices and standards ensures that the hotel market is
among the most efficient consumer markets. Potential hotel customers
have real time access to price developments and can make informed
decisions based on this information.
With regard to your services point that Hotel is best suited for guests
looking for remoteness and proximity to nature and specific amenities
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rather than city travellers. Our services do not hold the same view,
take, for example, the following quote from the Ritz Carlton website
"Whisk yourself away to a Palladian estate tucked back in the
woodlands of County Wicklow, on Ireland’s east coast. Take an
enchanting stroll amidst the gentle green hills and sparkling lakes of
Powerscourt Gardens, then head into Dublin for some cosmopolitan
flair. The sumptuous surroundings of our Ireland hotel combine the
luxury and tranquility of country living with city chic."
This is what the Hotel offers - the combination of remoteness and city
chic. A customer can choose either or both by remaining in the surrounds
of the Hotel or by taking the bus/car into the city centre just 35 minutes
away. This closeness to the city also opens up the possibility of
conference and events business from the city. In one day visitors can
experience both worlds without any need to move hotel. The attached
link to its press release on the development of the hotel may also be
useful.
http://corporate.ritzcarlton.com/en/Press/Properties/Powerscourt/Releases
/Opening
CONCLUSION
The Irish Authorities would welcome the opportunity to clarify any
remaining matters in relation to this project before the Commission
comes to a decision. While we understand that the Commission is
processing a large volume of projects, we would welcome an indicative
response at the earliest opportunity.
Yours sincerely
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