The sorry saga of Room 713

By ANNE GIBSON

When Alick Wilson got a large redundancy cheque, property was on his mind.

The Torbay master mariner with a penchant for wearing shorts in winter works on cargo ships and was fortunate to get another job straight after he was made redundant.

But he was left with "an unexpected present" in the form of a cash payment.

About the same time last year, Jim Speedy's Covington Group was trying to tempt investors to buy into the North Shore's tallest new tower, the 23-level Spencer On Byron.

Investors were guaranteed an attractive 8 per cent net income if they bought one of the hotel rooms managed by Hawaiian Castle Group.

Wilson's wife, Jacqueline, was a little more cautious about what to do with the money - a term investment seemed attractive - but he threw caution to the wind and decided to visit the people marketing the Shore's first international hotel building.

So he turned up at the Takapuna display suite, where he met Robert Young, who was marketing the offer for Covington.

"Right from the time I walked in, there was no pressure. They were obviously there to make a quid like the next gentleman," Wilson recalls, "but these people weren't standover merchants."

Wilson trusted what he was told during the visit, did the sums and decided it was a sure bet, especially as the hotel had been leased long-term to a reputable and powerful international hotel operator.

The sugar coating was that the guaranteed annual return ran for yonks - 8 per cent for the first two years, then a minimum 8 per cent for the next three and a guaranteed minimum 6 per cent for the next five years.

All up, the investment guaranteed a good 10 years of attractive payments.

Wilson did not see how he could lose, particularly since the North Shore had a shortage of top-class, short-stay accommodation. With interest rates low, property demand and prices rising and the America's Cup on its way, he was sure he was doing the right thing.

So he paid a 15 per cent deposit for Room 713 on the seventh floor with stunning views over the city and top-quality fittings. The room was priced at $228,000, but he paid an additional $25,000 for a carpark, outlaying a total of $253,000.

He borrowed most of the purchase price - $210,000 - from the bank. Even though he realised he would have to cover the interest bill on this, he reckoned the 8 per cent guaranteed return from the hotel would more than cover any borrowing costs.

Given that North Shore property is one of the best performers in the rising residential market, he also reckoned that the capital appreciation yielded by Room 713 would make up for the cost of servicing the large debt in the long term.

Everything went well for about a year. Castle paid him a healthy $1897 a month as the 8 per cent guaranteed return. Wilson was thankful this was a net figure and calculated after expenses such as the body corporate levy, insurance and rates were deducted.

GST reduced this to $1686.67 a month, and he had to cover a monthly mortgage repayment of $1452. But that still left him a monthly cash payment of $234, which he saw as a comfortable margin.

Not revealed in these calculations are the other benefits Wilson expected. Because Room 713 was bought and operated purely as an investment and he was not living in it, he was entitled to claim tax rebates from Inland Revenue for any expenses and outgoings he had to pay to own the property.

So he did not really intend to make a large net profit, merely to make a small amount and use the investment as a vehicle to reduce his tax as a wage earner.

Wilson used to see the Spencer On Byron in the distance and proudly tell friends: "There's my pub!"

He was delighted with his investment, and although he was allowed 14 days' free accommodation as part of the deal, he did not take this up but was thrilled just to drop in occasionally and see how busy the place was.

But this month, he got a nasty surprise in the mailbox. Castle Group's chief, Rick Wall, wrote to inform him that Castle was invoking a clause in its contract to allow it to change the financial arrangements because of "unexpected events".

Last week, Castle wrote to about 250 investors to say the hotel was suffering financially through a combination of circumstances, including the effects of September 11 on tourism and various airline collapses. Wall said that although the hotel was not performing as expected, this was nothing to do with Castle. The Hawaiian giant was quite entitled not only to halve the payments on what had been "guaranteed" to investors, but theoretically to demand a return of payments made since the hotel opened.

Wall said Castle was interested in preserving the long-term relationship with the investors, so he would not take that step "at this time".

Wilson was dumbfounded. What vexes him most is that Covington's documents clearly stated that the returns were guaranteed. He based his investment on this written promise and is at a loss to understand how this can change.

He feels powerless. "We're just a bunch of independent owners. How can we fight this thing?" he asks, noting that he has received information telling him many of the investors are living in Hong Kong.

Besides which, he does not have a lot of time to spend on the problem. He is off back to sea this month and can hardly afford to take time off to sort out the mess.

"I can't really see where I have gone wrong. I think I've done everything correctly. I checked it out. I got my lawyer to look at it all.

"I believed Covington when they said the 8 per cent return was guaranteed. But what I can't really understand is how can it be guaranteed if there is a force majeure clause? It's either a promise or it's not."

Young - who marketed the rooms last year for Covington - also feels trapped. He featured in the latest Weekend Herald saying the situation was "bizarre" because the hotel's occupancy had appeared high and he could not understand how Castle could invoke the special clause.

Wall wants investors to call him directly in Hawaii if they have any concerns. His press release last week said Castle was entirely within its rights to change the terms of the arrangement, given that when it set up the deal in Auckland it could not have known how international tourism would be affected by September 11.

"The clause, common in most leases, entitles the company to seek relief from leasing terms if events beyond its control affect its business," he said.

"It is being invoked reluctantly, as a result of the tourism downturn.

"The property opened in July last year and within two months it was not only hit by the worldwide tourism downturn which followed on from the terrorist attacks, but also the collapse of Ansett Australia, which affected New Zealand's biggest inbound market.

"The collapse of Canada 3000 [airline] as a direct result of the September events also had an unexpected impact as the tour company had chosen the hotel as its preferred Auckland long-stay supplier.

"The company has paid investors their expected 8 per cent return during the first year, despite the downturn's impact on hotel revenues and profits.

"It had opted not to follow the example of a number of hotel and tourism operators by invoking force majeure immediately after the September attacks."

Roger Seavill, one of Colliers Jardine's top sales agents, said he would not have pointed out the force majeure clause had he been selling rooms in the Takapuna hotel.

"There's nothing I could caution people against because this clause covers so much, and for me to give people a penny lecture on what it might mean - well, it would be like me asking them 50 times over if they sure they wanted to buy the property."

Jones Lang LaSalle Hotels held a conference in New York in December to discuss the effects of September 11. The conference was called Handling a Hostile Hotel Environment. Delegates talked about the force majeure clause in relation to hotel investments, but one speaker said it had proven "nebulous" following the terrorist attacks, as no precedent existed.

All this is cold comfort to Wilson, who advises others to be wary about believing in guaranteed returns.

Castle Resorts & Hotels