The UK Budget delivered a friendly-than-expected approach to Real Estate Investment Trusts.
The much-feared conversion charge was set at a reasonable 2% of gross assets and can be spread over four years. And the great bulk of the rest of the detail is friendly towards the property industry and, more narrowly, the hospitality sector.
Another fear prior to the Budget, for example, concerned distribution requirements. Rather than being set at 95%, as was previously suggested, these are now at 90% after capital allowances.
Mark Nichols, tax partner at law firm CMS Cameron McKenna, said that it appears that there will now be a significant take-up of REIT status by existing quoted property companies once the new regime comes into effect in 2007.
Less clear, however, is whether private property groups, almost all entirely held offshore, will decide to adopt the new status. Nichols pointed out that as such entities are already effectively tax free, there is little advantage in paying the 2% conversion charge.
Tax advisers Chiltern, parent of Chiltern Mondiale, the group that bought the 11 Courtyard by Marriotts in November 2004 from Whitbread, said that it was encouraging that the Government had been prepared to listen to industry representation.
Among the examples it cited was the fact that the interest cover requirement has been reduced from 2.5 to 1.25 times, allowing the possibility of gearing around the 60% level.
But it considered the conversion charge as being set at a high level. It also criticised the rules regarding the ownership of interests in a UK REIT. This restricts investors to holding no more than 10% without incurring some tax (although the REIT status will not be completely lost as was at first feared).
The ownership restriction will act as a disincentive for existing groups to adopt the new regime, said Chiltern.
For hotel owners, there is the added complexity concerning management contracts. For budget players, such as Travelodge or Accor's Ibis and Etap brands, leases are acceptable.
Indeed, in the case of Accor, it has already struck two deals in France with the French REIT equivalent Societe d'Investissement Immobilier Cotee. Thus the new UK REIT seems an ideal for such budget and economy hotels.
For midmarket and upscale hotels, however, leases are generally not acceptable, at least for Anglo-Saxon companies.
In such cases, another entity will have to be created to own the lease. The hotel operating company will then have a management contract with this tax paying entity.
Although more complex, it does not rule out REITs as a possible vehicle for upmarket hotel properties.
Indeed, REITs may prove an attractive exit route for much of the private equity held hotel real estate such as the LRG portfolio of UK InterContinental hotels.
The big win for hospitality was in persuading the Government that leisure trading companies should be acceptable property types for REITs. In the first draft of legislation published in March 2004, leisure trading companies were specifically excluded.
Hotel Analyst, together with CMS Cameron McKenna and Jones Lang LaSalle Hotels, formed an industry lobby effort to change the Government's mind. Later joined by the British Hospitality Association, the push succeeded.
This grouping intends to organise a briefing day in the next month or so. Further details will follow.