Project/Case Overview
Property Type
Purpose Built CBD Hotel subject to long dated ground lease and operating services agreements
Client
Private Sector – Property Owner and Operating Entity
Reason for Service
Market Rental Valuation / Lease Review Advisory
Preston Rowe Paterson was instructed by King & Wood Mallesons to assess the market rental payable under a newly executed ground lease for 302 Pitt Street, Sydney, being a purpose built CBD hotel branded as Aloft Sydney Pitt Street.
The valuation was undertaken on an “as if complete and operating” basis, having regard to the detailed suite of interrelated agreements governing the ownership, leasing, operation and branding of the hotel.
The engagement required more than a conventional rental assessment. It necessitated a detailed understanding of the economic balance between landlord and lessee interests, informed by hotel operating forecasts, management fee structures, incentive arrangements and capital commitments, in order to determine a defensible market rent consistent with the lease review provisions.
Summary of Scope of Services
Our instructions required us to:
- Interpret the rent setting provisions of the lease and associated annexures;
- Analyse the interaction between rental obligations and hotel operating performance;
- Review hotel operating forecasts prepared by third party consultants;
- Assess the minimum rental return required by a hypothetical prudent lessor;
- Assess the maximum rental affordable to a hypothetical prudent lessee after allowing for operating costs, management fees and required returns on capital; and
- Determine a market rental outcome consistent with the assumptions mandated under the lease review provisions.
Asset Overview:
The asset comprises a purpose built, 16‑storey CBD hotel at 302 Pitt Street containing 136 guest rooms, operated under the Aloft brand and held under a long dated ground lease subject to integrated hotel operating and branding agreements.
Valuation Methodology
A market based, dual constraint framework was adopted, consistent with valuation practice for specialised hotel assets subject to complex operating structures:
Lessor Return Analysis
- Estimation of total development cost attributable to the landlord;
- Assessment of a reasonable market return on cost having regard to risk profile and asset class;
- Derivation of a minimum acceptable rental to a willing but not anxious landlord.
Lessee Affordability Analysis
- Detailed review of hotel operating forecasts on an “as if complete” basis;
- Allowance for all operating expenses, management fees, incentive fees and licence fees;
- Consideration of required returns on lessee capital contributions, including pre opening costs;
- Estimation of the maximum sustainable rental payable by a willing but not anxious tenant.
Market Rental Determination
- Reconciliation of the above constraints;
- Adoption of a negotiated midpoint outcome, reflecting how market participants would reasonably balance competing interests under the lease assumptions.
This engagement demonstrates Preston Rowe Paterson’s expertise in:
- Market Rental Valuation of Specialised CBD Hotel Assets
- Advisory Analysis of Long Dated Leasehold Interests
- Valuation of Assets Subject to Complex Operating, Licensing and Branding Agreements
- Balancing Landlord Return Requirements and Tenant Affordability
- Providing Defensible Valuation Advice in Legal and Dispute Contexts
25 Year
long dated ground lease with annual market rent reviews (no options)
136
room purpose built CBD hotel operated under the Aloft brand
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