Type: Business premises renovation allowance scheme
Aim: Income tax relief, growth and the potential for income by investing in the conversion of the Kansas Building in Liverpool’s Cavern Quarter to a 5-star hostel
Minimum investment: Lump sum £100,000
Charges: Initial 5.5%
Commission: Initial 3.5%
Tel:020 3006 7530
Evolution Liverpool is a business premises renovation allowance scheme that will buy an empty property in central Liverpool for conversion in to a 240-bed space 5-star hostel under the Evolution brand. BPRA schemes provide an incentive to bring derelict or unused properties back into commercial use through tax relief, with an allowance of 100 per cent for expenditure on converting or renovating premises in disadvantaged areas defined by the Assisted Areas Order 2007, and in Northern Ireland.
LIFT Financial chartered financial planner Ross Glanfield observes that Evolution Liverpool is RAM Capital Partners’ first BPRA scheme. “ This provides investors with an opportunity to participate in the redevelopment of the Kansas Building in central Liverpool in to a 240-bed space 5-star quality hostel and large café bar.
“The partnership has agreed to purchase the property for £1.75m and the bulk of the refurbishment costs will qualify for tax relief to the extent that a 50 per cent taxpayer would recoup 54 per cent of their initial cash investment,” says Glanfield. He adds that the overall project cost is £6.6m.
“The hostel has been valued at £7.1m based on projected stabilised year three earnings and £7.6m on disposal after seven years. Bank debt has been agreed with RBS at Libor plus 3.5 per cent, capped at 5 per cent for £2.875m,” says Glanfield.
Glanfield notes that the cashflow model in the literature predicts that during the first seven years, the venture will provide sufficient profit to allow part of the loan to be repaid, reducing it to around £2m. “During the term, the excess profits will be distributed in full and should cover the income tax liability on the profits used for the loan repayment. This projection is based upon an occupancy rate of 79 per cent – this would need to fall to below 59 per cent before the capital repayments on the loan could not be met,” says Glanfield.
If this happened, investors would need to consider injecting additional funds because a default on the loan within the first seven years leading to repossession would trigger a claw-back of the tax relief.
Glanfield adds that it is estimated that if a 9.3 times multiple ofearnings before interest, taxes, depreciation and amortisation – a way of measuring the value of a company – is achieved, the net final profit for each £100,000 of investment will be £104,212 excluding BPRA relief.
“BPRA schemes are unregulated and can only be marketed to certain categories of experienced or professional investor. They are business opportunities rather than standard collective investments, and only higher-rate taxpayers who pay 50 per cent tax achieve the maximum tax efficiency.”
He points out that Evolution Liverpool invests in a new brand in the largely untested hostel sector and an investor would be advised to carry out their own due diligence on the investment potential. “Also, this scheme is different to the traditional BPRA scheme where the investor would look to recoup the cash investment through tax relief. The investor in the Kansas Building has a significant net contribution even after relief, which increases the risk exposure but also amplifies the upside,” says Glanfield.
LIFT Financial is reassured by the backing of RBS, which Glanfield says has been largely absent from the property market since 2008. He also likes hotel operator Starboard’s commitment to building the Evolution hostel brand.
“There is also limited competition in the retail BPRA sector with only Downing, which is marketing a traditional BPRA scheme in Birmingham, and Scion, which is launching a new branded compact hotel in Liverpool, offering any alternatives.”
Considering the potential drawbacks, Glanfield says: “The downsides of this scheme are the extent to which capital is at risk and the slightly ambitious occupancy rates which, if failed, will lead to a tax tail on the investment and the potential for an additional cash call.”
Summing up, Glanfield says: “The 5-star hostel market is a new concept to the UK. But in times of austerity, and with the right marketing, there is the potential that this style of overnight accommodation could give a healthy return to the willing investor.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Good