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Know the Cost

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

Hopefully we all love or enjoy what we do for a living, however we do not do it for the sport.  A business must produce a profit to survive.  Knowing how or what is needed to achieve a profit is a starting point.  In its simplest form, product cost plus mark-up equals selling price.

When a product or service is offered to a market, what it costs a business to purchase then get that product or service to the market in a position to sell is the breakeven point.

By understanding where the breakeven point is and what the product or service can be sold for in the market, one is able to know the following:-

  1. The profit level of the product or service
  2. The amount or volume of sales required to make a profit
  3. The impact on profit of declining tariffs/prices or volumes of sales
  4. The level sales can reduce to before a loss is incurred

The addition of a mark-up to make a profit and still be competitive then determines the price the product/service will be offered at.  The product of the motel room and associated services cost the operator to rent the room in wages, cleaning products, laundry/linen, electricity, insurance, wear and tear, etc.  A combination of fixed and variable costs.  If the total cost including these expenses and others are unknown, then how can the price be set to ensure the business is not losing money on the sale.  If a motel is selling a strong number of rooms at a solid occupancy rate however at the end of the month there is no money in the bank account, then alarm bells should be going off.

Accurate costs to rent a motel room offer very useful tools of measurement or key performance indicators (KPI’s), so a motel operator can know how much they can afford to rent a motel unit for to breakeven and then to make a profit.

Each different accommodation business/property will have different cost bases.  The reasons why can be due to several factors that affect this figure – property features, operation and utilities.

Property Features

  • Unit Size – the square metre area that the unit occupies.  A standard studio unit costs less to occupy than a 2 bedroom unit.
  • Self-Contained – the cleaning costs alone to rent a self-contained unit can be substantially higher
  • Age of Property – how old the property is may determine how much upkeep is required to the buildings
  • Standard of Property – if a motel is in disrepair it will require more expense to maintain
  • Location – sea air may increase corrosion of buildings such as metal staircase hand rails, roofing, etc.  Building movement in some areas may create brickwork cracking and other issues.
  • Unit Fit Out – what condition is the furniture and fittings in?  Does the high level of humidity require tiles rather than carpet?  Are blinds or block out curtains required?
  • Restaurant – a restaurant will substantially increase many costs, however this is a separate income department where the same considerations on what it costs to produce that product are relevant
  • General Services/Facilities – a lift on site, trees and gardens, swimming pool, spa or sauna are all services/facilities that contribute to the cost base
Operation
  • Lease/Freehold – Is the tenure leasehold with a rental to be paid each month, or is it freehold where mortgage repayments are due?  Interest rates will rise and fall changing repayment amounts.  Interest payments will be applicable with leasing as well however the level of borrowing will be generally lower than a freehold purchase.
  • Type of Clientele – the motel’s business could be corporate customers, tourists, families, contractors, etc
  • Laundry – is the linen cleaned onsite or offsite at a commercial laundry?
  • Staff Levels – are staffing levels correct or is the business over or under staffed?
  • Owner/Operator or Under Management – the cost of management wages will increase the cost to rent a motel unit.  This can be a moot point as the owner should expect to pay themselves a wage for their time anyway
  • Consumables – what type of soaps, tissues, shampoos, etc are included within the unit?
  • Cleaning – are the cleaning products the most cost effective?  How long are the cleaners allocated to clean each room, e.g. 20 minutes, 30 minutes, or unlimited?
  • Eftpos/Credit Card Fees – the fees charged by some credit card operators are higher than others
  • Marketing – is the motel a member of a chain?  The fees paid to a motel chain form part of the cost to rent a motel room, as does the commissions for booking sites and any other marketing initiatives.
Utilities
  • Property Rates - coastal motels may include much higher property rates than an inland motel where the land value is not as high as a beachfront property
  • Electricity/Gas – the costs of electricity have risen substantially in the past 3 years
  • Telephone – What type of phone system does the motel have?  Is it reliable in its charging of customers?
  • Land Tax – Is land tax paid by the property owner, Lessee or not applicable?
  • Insurance – the cost to insure properties has more than doubled in some areas over recent years
Costs easily add up and can “blow out” if not contained.  Knowing what the costs are is the first step in containment and an operator can then be confident in their sale price position.

Dining In or Out?

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

Opinions always differ about restaurants in motels, some love them some hate them, everyone has their own idea.  Times and attitudes have changed a lot in this regard from 20 years ago, even 10 years ago for that matter.  All the way back to 1995, I recall the motel owner/operator stayed up serving behind the bar in the restaurant until late into the night, with all the reps mingling and having a good time.  They were then up early the next day cooking bacon and eggs to complete a list of breaky orders.  It was a long day, but the financial benefits were great.  Today however the food and beverage industry and the dining requirements and work behaviours of guests have changed.  In addition, the major changes in technology over time has given every work-related traveller a portable office wherever they go.  A phone, tablet, or laptop allows the ability to be just as productive outside the office as in, thereby changing the way travel, accommodation, dining, and evenings are spent whilst away from home.
Back in 2012 when I last wrote about food and beverage within the motel industry changing, in house dining within some areas of the industry was diminishing slowly but I noted it was gaining momentum.  Well, since then the number of restaurants within motels has reducing substantially as well as the simple meals to rooms as well.  Many restaurants have either been closed, are sitting dormant or have been remodelled into additional motel rooms, or larger residences for families and lifestyle reasons.
Over the last 5 years or so things have continued to change even more rapidly.  Many have changed the way their businesses operate by focusing on accommodation and moving away from the food service side of the industry.  There are many reasons for this some of which include: -

1. The lower profit margin the food and beverage side of the business offers in comparison to the accommodation side of the business
2. The added requirements of additional employees and the operators increased amount of labour and involvement in the dining area
3. A lower interest in the food and beverage area by new incoming owners/operators who would rather remodel the restaurant area into more rentable motel units
4. Increased competition from other faster and cheaper dining options available
5. The proximity to other dining options
6. Advances in technology as mentioned, which has impacted several different ways

The refurbishment of restaurant and dining areas within motels into increased numbers of rentable motel rooms is growing.  An existing area under roof that is not being utilised to its fullest extent that can produce a strong income and profit offers excellent value adding opportunities.  An existing area under roof where the exterior walls are not being moved, only the internal fit-out offers less requirements from local Councils and therefore helps reduce the capital outlays for such works.

There will however always be a strong demand for food and beverage within larger corporate based motel operations.  The mix of accommodation, dining, and conferencing in the one locality is only going to continue to grow with the demands for training and conferencing growing within most industries.  This may require the industry to change and grow with the rapidly changing requirements of the market where everything is demanded to be within a finger-tip’s reach and supplied without delay.

Locality is also a driving force in the decision making in whether in house dining is viable for the motel’s future.  In areas where there are few dining options for guests, the value of the restaurant to the business may not be in question.  Often it is then a very viable business in its own right.  In locations where other dining options surround a motel, the question becomes more relevant.

Many buyers looking to acquire a motel are looking for something that can offer added value.  The opportunity that an under-utilised area within a motel offers such as closed or non-profitable dining area, can be a great way to add value without expending costs that make building expansion works prohibitive.

Never Too Old

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

“If I was ten years younger I would buy that motel”

I wish I had a dollar for every time I heard the saying over the last 23 years.

I think in many ways this comment is often made, not as an excuse, but it is probably more about something many of us suffer from, procrastination.  It is often the worst enemy in holding people back from achieving more than they do, in any given situation, whether it be in our business activities, personal lives, sports and recreation, and so on.

The previous issue of Resort News included the article “12 Reasons to Buy”.  Within this article we looked at 12 very strong reasons as to why people invest in motels.  This article continues from last month where all those reasons are accepted, however procrastination results in them not deciding to go ahead.  It ultimately takes precedence over so many good reasons.  We considered these reasons based on the motel industry, current motel and accommodation market, wider economic factors, financial, family, and personal considerations, and others.  The quote above can be considered in many ways, an easy or convenient excuse not to act or invest in this case, for reasons such as, having too many aches and pains, the lack of motivation, too old, etc.  It is an easy way out in one’s mind for not making a positive decision when all the facts point toward it.  Opportunities lost are always recalled after the fact and filed under “hindsight” in months or years down the track and are always regretted.

In my opinion it is often people who are still young and active that make this comment.  It can be relatable at any age really.  I know myself having recently agreed to go back to playing a competitive sport now at age 43 that I have not played since I was 19 years old, at times seems like a bad idea.  Being beaten or out sprinted by an 18-year-old immediately has me looking to the easiest excuse, “well he does have 20 years on me” or “if I was 10 years younger I would have performed better”.  Of course, I would, however am I going to keep saying this week after week, after every game.  I was using this excuse a lot at first then I started to dislike what I was hearing.  I then started to consider a link between what I was saying and the comment I was hearing in regarding to investing in motels.  Both role off the tongue quickly and easily and really are throw away lines.

I have been very fortunate to have worked with some very good people over the years who have bought and sold many motels and worked as hard (or as little) as they wanted to as opportunities presented themselves.  Four individuals aged in their 80’s, who continue to buy and sell accommodation businesses are great examples that you are never too old.  They are always active, on the go, and looking for the next business challenge to work on.  They enjoy the opportunity and challenge and don’t want to slow down.  They may not work the businesses on a day to day basis like they once did, but there is no doubt who is making the important decisions to ensure the future success of their accommodation businesses.  These people immediately come to mind when anyone much younger than them says to me, “if I was 10 years younger” …….

Buying one’s first motel is the biggest step.  The acquisitions after that see the steps getting smaller and smaller.  In many cases it is a major change of life decision, in both career and lifestyle.  Procrastinating about it, not taking the step, and acting, then regretting it later down the track is never a good feeling.  Time has a way of creeping up on us very quickly.  Therefore, don’t put these things off any longer!  Go for it and take the adventure head on.  Procrastinating about it now will ultimately drag on for another 10 years.

Twelve Reasons to Buy

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

There are many reasons why a large majority of people buying motels today have been in the accommodation industry before.  Many of the benefits of owning a motel are what keep people coming back to the industry.  Within the motel industry today there are more and more people who already own a motel that are acquiring additional motels to add to their portfolio.  This has been the case for some time.

Every different business or industry has it benefits, however when comparing one to another consider some of the benefits a motel offers.

  1. High Return on Investment – The returns on investment for motels are strong, depending on certain factors such as location, economic strength of the region, standard of the property, strength of the business, profitability, clientele, etc
  2. Current Market Activity – most recent activity within the market has proved some great buying opportunities.  Savvy investors are beginning to take advantage and are picking up some quality properties as economic activity starts to improve.
  3. Report to No One – You are your own boss and the one in control of the business’ future.  There is no one to report to or answer questions of.  The buck stops with the business owner, who makes the decision on what directions the business takes.
  4. Low Capital Outlay – When compared to other property options motels offer substantial value for money.  Consider they produce a high return on that investment, they also include a home/residence and the land generally sits on a prominent site with a large traffic volume past the front door.  The downside risk of the investment is generally low as it is underpinned by a strong land and buildings component.
  5. Financing – Banks are historically very comfortable lending for motel acquisitions as they are solid and secure businesses.  A low 35% deposit is required with the balance able to be financed, which leads on to the next reason.
  6. Taxation Benefits – This is dependent on numerous factors such as how the ownership structure is setup.  The tax benefits of living out of the business includes a large amount the cost one incurs living in their stand-alone home such as insurance, electricity, food, beverages, phone costs, rent/loan repayments, motor vehicle costs, etc.
  7. Strong Cash Flow – Upon commencing operating a motel there is an income from day one depending on the level of occupancy.  An operator will achieve a certain level of cash flow immediately as most guests pay by credit card.  The amount of cash taken by motels had diminished, however for whatever reason I have noted in more recent years motel owners advising they have been taking increased amounts of cash over the counter.
  8. Limited Stock on Hand – Motels carry very low amounts of stock.  Motels with restaurants will carry more stock than those without but generally no more than $15,000, depending on the size of the food and beverage operation.
  9. Ready Market – When the time comes to sell there is always a competitive market eager to acquire good quality motel businesses and properties.  The market may have its highs and lows but over the last 22 years selling motels, this has always been the case.  Not a bad record of accomplishment for the industry.
  10. Easily Operated Under Management – Motels are comfortably managed by a couple or often one person, so if an owner/operator decides they would like to step back from the business for a while there are many good managers available who can manage a motel’s day to day operations.
  11. Onsite Residence – Offers a home to live on site for a family allowing more family time together whilst operating a business.  Children can also get involved in some ways and start learning from a young age.
  12. Building Customer Relationships – For those who enjoy building customer relationships, motels can offer a lot of repeat clientele if the guest is looked after.  There can be a lot of satisfaction gained when a customer keeps coming back regularly because they are happy with the service being provided.  It is confirmation a good job is being done.

Discovery Parks Acquire Airlie Cove Resort and Van Park

Adelaide based Discovery Parks now has a presence in the Whitsundays, adding Airlie Cove Resort and Van Park to their portfolio. Set on 28 tranquil acres close to the bustling tourist destination of Airlie Beach and adjoining the spectacular Conway National Park the property has a diverse range of accommodation options including Bali Villas, 1 & 2 Bedroom Villas, Holiday Cabins, Ensuite Cabins, Studio Cabins, Caravan Sites, and 2 Camping Areas.

The Park is well serviced by modern facilities including three large Polynesian style camp kitchens, bbq gazebo, 2 amenities blocks and laundry. The Resort is a destination within itself, with plenty to keep guests of all ages occupied including resort style pool with water slide, water park featuring a big tip bucket, three slides, walk through spray tunnel and ground sprayers, pirate ship playground, jumping pillow, TV & internet room, go karts and mountain biking tracks. 

“The idyllic location, quality cabins and range of facilities the Resort offered made this property highly sort after by investors.” said negotiating broker Ryan Doughty of Queensland Tourism & Hospitality Brokers.

Discovery’s chief executive, Grant Wilckens, said the Airlie Cove acquisition was a strategic investment in the globally recognised Whitsundays region where strong demand for accommodation is forecast beyond 2020.

“The Airlie Cove Resort and Caravan Park is a beautiful family holiday destination with the largest resort pool in Airlie Beach, water slides, mini golf and an outdoor cinema” he said. “It compliments our resorts in Coolwaters Yeppoon, Fraser Coast and Byron Bay – providing high quality accommodation options for customers travelling the coastal route.”

It is the first deal since Discovery Parks’ acquisition of the Top Parks Brand, which created a network of more that 220 parks.

Source: Discovery Parks, The Australian Financial Review

Anecdote: Keeping Everyone Happy

Written by Andrew Morgan, Specialist Motel and Accommodation Broker

Recently an old friend and I arranged to catch up.  He told me that he and others within his business travel around the countryside every week or two and stay at generally the same motels whilst away.  I was eager to hear his feedback on the motels he stayed at and if he enjoyed his stays or not.

The line of work he is in requires early starts in the morning therefore a good night sleep is his main requirement (as it is for most).  Many different services offered by the various motels he stayed at did not hold much interest for him other than a good comfortable bed, pillow, a carpark close to his unit and peace and quiet.  His feedback was that in the main, most motels he stays at provided this, which was great to hear from my perspective.  Unfortunately one did not.  He had no issue with the bed, pillow and carpark, however the peace and quiet he needed for a good night sleep was not on offer.

In his words, “I am happy to have access to all the services the motels offer such as WiFi, Austar, etc, but to not have a good night sleep due to noise, those other things count for nothing”.  In his case he said that other guests travelling together staying in the motel all congregated outside the unit next to his and had a bit of a get together.  Not a big party, but just a small gathering over a few beers.  He said in real terms the group were probably only four metres from his bed with an exterior wall, door and window in between, and that they were not yelling out, but just the mix of loud talking and laughter would not allow for any sleep.  Obviously he had the choices to speak to the group, speak to the manager or do nothing.  He chose to do nothing as he did not want to cause a scene or upset anyone.

The end result unfortunately in such a circumstance is that the guest leaves the motel unhappy and in this case he has vowed never to return to that particular motel.  To his credit, he did not post a bad review on any web sites which as he said “would have been unfair to the manager since I did not do anything about it”.  Not having been there or knowing the exact circumstances at the time it is hard to say whether he should have acted upon the situation or not, and if not then he has no one else to blame.  The other is that he should not have had to act upon it, that as a paying guest of the property he should have had the right to a good night sleep provided to him.  He felt that the manager on site should not have allowed a group of guests to gather directly outside a unit and stay there, whilst other guests should have been allowed a good night’s sleep.  He believed that it should have been management who realised what was happening and that they should have moved the group to an area of the property (which was available) where they would not disturb anyone.

A difficult position is created for the manager or motel owner who has not received a complaint and therefore how can they keep that guest happy if they have not been made aware of the guest’s issue.  Ultimately, who’s right or who’s wrong does not matter from the motel owner’s point of view other than the fact they have lost a future return guest.  Also, that he is telling others that he did not have a good experience at the XYZ Motel in that town.  Anyone who hears the story will then most likely avoid the motel as well and stay elsewhere, thereby damaging the goodwill of the business going forward.  The economic side of things hit home when he said his business spends approximately at least $15,000 on accommodation each year.  No business can really afford to lose this to a competitor.

I guess all one can do is make sure they provide guests with as quiet a motel facility as possible and allow and direct other guests (so as not to upset them) to congregate elsewhere on the property, such as by the pool or wherever the other guests will still be allowed a good night’s sleep.  As always, a difficult balancing act for moteliers in any case, trying to keep everyone happy.

Selling: Timing is Everything

Written by Andrew Morgan, Specialist Motel and Accommodation Broker

Often late in the year people say to themselves let’s have a think about selling in the new year.  The new year rolls around very quickly and suddenly, it’s time to make some decisions.  How does one know when is the best time to sell?  To answer one question, lets pose another, or another three, to get the best answer for each individual owner’s situation.

1. When am I ready to sell?
2. What is the market like for selling a motel?
3. What is the best time of year to sell?

When am I ready to Sell?
Probably the most important of the three questions posed.  Knowing when you yourself are ready to sell is a difficult question to answer.  I firmly believe that once you start asking yourself this question, then it is time to do something about it.  No different to an elite sportsperson wondering when it’s time to retire.  If asking the question, then it is time.  Too many moteliers procrastinate about this decision until they get past a point of no return.  Staying on too long can end up in a seller making rushed or bad decisions in order to get a quick sale. The position all sellers would love to be in is selling on their own terms after having made informed decisions instead of forced decisions due to tiredness, personal pressure, being burned out or financial pressure.  A good idea is to make a decision such as taking the business/property to the market in a certain period of time say 3, 6 or 12 months, etc.  This then gives the owner the opportunity to prepare the property and business for sale rather than making a snap decision to sell whilst unprepared.

What is the Market Like for Selling a Motel?
First things first, get some advice.  Speak to a specialist Motel Broker who has been in the industry for a long time with a proven history of successful motel sales.  As the name says, a Broker will broker a deal that is best for the seller.  This way you are more likely to get the right advice, rather than the wrong advice for a “Listing Agent” to get as many listings as possible and hope that one sells at any price level here or there
Recent historical sales provide the most up to date information on how the market is tracking.  What has sold and at what price.  Also, how many motels are on the market and what prices they are listed for, will provide information on the competition in the market for buyer attention.  This information will offer enough details on what is for sale, what has sold and the how active the current market is for motel businesses.

What is the Best Time of the Year to Sell?
Historically we would say that the second half of the calendar year (July – December) was the time when more motel sales were transacted than the first half of the year.  As time has gone on and things invariably change, this situation has also changed.  We tend to now look at things on a year to year basis due to the fact that the previous market pattern has changed and no one particular half or time of the year dominates as far as numbers of sales go.  Generally speaking, year in year out, December and January are the quietest months of the year for transactions occurring.  This can probably be explained by people active in the market turning their attentions more to family, travelling and the holiday/festive season.  The rest of the year is probably dictated more by the second question above.  There is always an increased buyer appetite come March onwards as occupancies and turnover’s start increasing after the quiet months, the increase in motel sales follows the pattern of the industry activity.

Tips for Buying Motels - How, What and Why?

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

How to get started looking for a new business such as a motel is not always easy.  In gathering information, the web is usually the first port of call for any initial enquiry, and the simplest of searches will get things started.  As with a search on any topic, sorting good information from bad requires further investigation.  The next step may be talking to friends or relatives who are or have been in the industry.  Speak also to experts, not those who “dabble a bit”.

Consider the preferred tenure of ownership that meets one’s needs.  The main two types of ownership tenures available for Motel acquisitions are Freehold and Leasehold.  Both offer different benefits and burdens to the owner and one must determine which suits.  Weighing up the facts and comparisons between the two will help determine what is suitable for each investor.  Another main decision that is required to be made early on, is whether one is going to operate the business themselves or not.  This may affect the type of tenure that should be considered.

If the new owner is not going to operate the business themselves then someone else will need to on their behalf.  The business can be operated by a manager or can be sold to an operator whilst the freehold property (land and buildings only) is retained.

Property Specific Motel Matters to Consider

1. Number of Units – There are very different schools of thought within the motel industry as to what the minimum number of units should be to make a motel successful.  Individual should determine how many units they wish to operate and then work towards that.  The budget that is available will also affect this decision.

2. Dining – Some motel operators love restaurants and others do not.  This is the more social side of the business where operators can get to know and build relationships with their customers thereby making the decision for the guest as to where they will stay next time they travel to the locality.  This side of the business can also be a problem area if not operated efficiently.

3. Standard/Presentation – The standard of the presentation of a motel will affect the return on investment expected by the market.  If hundreds of thousands of dollars are required to rectify poor standards or years of neglect, it will affect the price that is willing to be paid for the property in its current state.  Motels that are not presented in the best manner can offer excellent opportunities to add value to the business/property by rectifying areas in need of work.

4. Location – the main positions motels tend to be focused are major highways, main roads, beach fronts and city centres.  These areas tend to be places where demand for accommodation is at its highest, such as business centres, tourist attractions or industry hubs.  Location does play a role in determining the value of a motel as the demand for a coastal motel has historically been higher therefore pushing the value of the motel higher and the return on investment lower.

5. Onsite Residence – Motels usually offer an onsite residence.  One must be aware however that although they are comfortable and large enough, they are not the size of a stand-alone house in suburbia.  There are substantial benefits of living onsite that include the lifestyle of a family living and working together and the tax benefits that are available.  The costs of living in a home in the suburbs are largely absorbed by the business in the case of a motel, such as food, electricity, council rates, water, insurance, telephone, and much more.

Business and Related Motel Matters to Consider

1. Online Reviews – Read but be careful what one takes on board.  The main thing is to consider the tone of the reviews in the main, and how they read, rather than individual reviews.  If there are nine reviews on a motel that are positive and one that is not, then go with the nine, as that tenth review may not be legitimate.  If nine reviews mention a specific issue with a property/business then consider just how big of a problem it is, and how easily it can be rectified.  Sometimes issues can be easily fixed by a new operator, and therefore may be to the benefit of the buyer in the future.

2. Lifestyle – Again the benefits of a family working together and the opportunities to grow with the business can be very rewarding.  Delegating certain areas of the business to key staff members where one is comfortable to, allows more time to get out of the property and take time out for family, schooling or other social activities.

3. Potential – The old saying is “no one buys any business unless they see potential”.  There is generally potential in every motel business of some kind.  A new broom always sweeps clean and a new perspective, vision and enthusiasm offers the opportunity to take a motel business to the next level.  See what areas of the motel are underperforming? What new initiatives can be implemented to gain more market share?  What areas of expenditure are too high and can be brought under control?  An injection of funds to do a refurbishment that the previous operator did not want to do is a proven method of adding value to a motel.  This is an area where one can take a position of advantage over competitors who do not reinvest back into their motel.

4. Finance – Historically motels are known as solid and secure investments and therefore financial institutions (in the main) are eager to lend against them.  They will generally lend 50% against the value of a leasehold motel and 65% against the value of a freehold motel.  In general terms these percentages offer a good base to start searching.  The balance percentage plus purchasing costs will need to be made up of preferably cash, or part cash and part equity against another property depending on the financial institution’s requirements.

5. Purchasing Costs – These costs can be substantial, however are a fact of life.  Government stamp duty accounts for the largest portion of purchasing costs.  Other costs then include legal fees for advice throughout the purchase process, search fees for the property and business such as council searches, liquor licence, vendor entity, etc.  Further costs can then include settlement adjustments for prepaid advertising, council rates and also the purchase of Stock at Value in order to continue to operate the business.

6. Return on Investment – This depends on many of the items included within such as location, standard of presentation, number of units, lease document, land area, etc.  Outside the business/property itself, the strength of the market and demand at that time plays a major role.  Motels do offer very strong returns when compared to many other business opportunities.

7. Cashflow – In most cases and depending on the time of year the first day of taking over a motel generally results in a good cash flow.  Most guests today pay by credit card or Eftpos.  Guests on accounts are more limited to large companies only (of whom many are tending towards credit cards now).

8. Future Resale – When it is time to sell there is generally a ready market for both leasehold and freehold motels.  If priced accurately most motels will sell within a reasonable time frame in normal market conditions when marketed correctly.

Leasehold Specific Matters to Consider

1. Who is in Charge – Many Lessee’s are unsure about their rights and the rights of the Lessor in a motel lease.  The lessee is entitled to “quiet enjoyment” of the property.  In other words they are entitled to operate their own business from the premises without any disruption from the Lessor, as long as they are not in breach of the lease.

2. Rent – The annual rental of a motel should never be more than the Net Operating Profit After Rent.  A new lease should have a commencing rental of approximately 40% - 45% of the entire Net Profit for the complex.  There are other methods for determining motel rentals such as a percentage of Turnover.  A dollar figure per unit site is often utilised as a check method.

3. Lease Period – Motel leases mainly commence as a 25 or 30 year lease (inclusive of option periods).  These are very long leases especially when compared to retail and commercial tenancies which are often 3 year + 3 year leases.  Even a lease that has been in place for 10 years that has 15 years remaining is a long term lease.  It is rare that motel leases ever run down too low as it is in both Lessee and Lessor’s best interests to have a long term lease in place for the security of each party’s investment.  The opposite may occur if the site is ripe for redevelopment, however there are many if’s and but’s in this situation.

4. Lease Terms – Who is responsible for what?  The terms of the lease and responsibilities of both Lessee and Lessor should be considered and advice sought from an experienced motel Solicitor in regards to whether the lease is reasonable or too onerous on either party.  Most motel leases are drafted with standard terms however may not necessarily end up that way in a final copy.  Therefore it pays to make sure one is happy with the Lease Document prior to entering the agreement.  As long as both parties act reasonably regarding extending leases then both benefit in the long run.

5. What am I Buying – The right to lease the land and buildings for a certain period of time on specific terms and the tangible and intangible assets of the business.  This can include goodwill such as the reputation the business has built up, the telephone numbers, email addresses, websites, social media profiles, the business name, the Plant and Equipment, the right to the liquor licence being transferred, etc. 

Freehold Specific Matters to Consider

1. Finance – The cost to purchase a Freehold motel is substantially higher than a lease simply because the land and buildings are also being acquired.  The interest repayments will be much higher so one must ensure that the business’ cashflow can cover the required loan repayments.  There are many benefits to owning and operating a freehold motel and many people purchase a lease motel in the first instant to build up funds and experience with the ultimate goal of acquiring a freehold motel.

2. Land Area and Spare Land for Expansion – Generally motels on a large parcel of land are sought after by the market and any with spare land offer the opportunity to expand and increase the number of units, income and profits and value of the business and property.  Being able to add value to a motel is a big incentive for those who wish to build up the value of their investment.

3. Passive Investments – The ownership of the freehold and business of a motel often leads to the owner selling the business to another operator and retaining the freehold property as a passive investment.  The comfort and confidence in the strength of the motel industry often results in motel owners wanting to keep an investment in the industry whilst moving on to operate another motel acquired or taking life a bit more easily whilst receiving a high return on their investment.

When considering a motel as an investment or lifestyle opportunity speak with experienced industry specialist professionals with a long association in the motel industry such as Accountants, Solicitors, Specialist Motel Brokers and Financiers.  Once a suitable motel has been found always complete a financial and legal due diligence of the business and property to make sure what you think you are buying is the in fact the case.

2017 Motel Market Wrap Up

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

As opposed to my 2016 end of year wrap up last year, in which the motel market had witnessed many changes, surprisingly 2017 has overall been very similar to 2016 in many aspects.

Again, 2017 has been an improvement activity wise over the previous year with demand for motels increasing, the volume of sales improving and the total sales value growing.

A quick summary shows the first quarter starting out in a quiet way which was the same as 2016.  The second quarter showed very good promise but did not reach expectations in the end.  The third quarter activity started to build and again the same as last year has continued to improve since then, ultimately finishing off the year very strongly with increased activity across the board however very strongly dominated by the freehold sector.

In contrast to 2016, prosperity has not been largely dependent on where one is located.  Some areas of the state that had struggled were able to make solid gains particularly in the 2nd and 3rd quarters of the year.  Additional supply of competition has ceased and there has been a reduction in supply in some areas with the redevelopment of sites (and future redevelopment) predominantly improved with older neglected properties where the highest and best use of the site was no longer the existing motel property.

The tourism sector has again continued to grow with Far North Queensland showing good signs of improvement.  The tourism market may have its highs and lows over time but continues to power on as one of Queensland’s driving forces in attracting guests requiring accommodation throughout the state.  Hamilton Island in the Whitsundays has again reported extremely high occupancy rates (albeit it with a shock to the system from Cyclone Debbie earlier in the year) for the last couple of years.  Many accommodation properties in the Whitsundays are either still off line or are open and operating with building works renovations ongoing.  The Australian Dollar has increased slightly however still seems to be maintaining that mid 70’s percentage mark.

The contraction of the Mining Industry that has received so much continued media coverage and has affected much of regional Queensland is largely behind us although some smaller towns are still struggling.  Again in many areas spending and confidence in the regions and industry has been continuing to build.  Some of the larger retailers in the regional areas have experienced excellent growth since January and reportedly even stronger improvement in the last quarter of 2017.

Again in similar fashion to last year motel sale transactions have been increasing as the year draws closer to an end.  The first half of the year was very quiet however as mentioned activity has increased in the second half compared to the first.  Some prices that have been achieved are very strong and can offer a lot of confidence to the market going forward.  Contracts being settled and new one’s being entered into, shows a very promising lead into early 2018.

Leasehold motel transactions have continued to be limited with the lowest amount of sales activity.  This market is predominantly comprised of first time entrants to the motel industry who have not been confident enough to take the step.  The old principles apply and short term lease terms and high rents will deter any buyer and put extreme downward pressure on the sale value achievable.

There is always a market for a well presented motel business that has good fundamentals, a good client base and is priced correctly.  We have noted some improvement however in the level of demand for motel leases in the last couple of months.  The sub $1m price range has seen a good spike in demand, which has been against the trend of the last two years.

Investors have sought the comfort that freehold motels offer with many freehold sales being recorded in the latter half of the year.  Any good quality freehold properties with up to date trading data, that are priced correctly, and presenting well are selling.  Experienced motel owners looking to invest in the industry have acquired some excellent buying opportunities in the current market and will no doubt do very well overtime from these motel investments.  Although finance for many investors may have been more difficult to achieve, the very attractive interest rates for investors has urged many to persevere until they were able to find a financier who would facilitate their funding requirements.

An interesting point to note is that often in times of fluctuating markets buyer demand and confidence can be hit and miss.  2016 and 2017 were similar in that many properties went to Contract only to see it not reach settlement due to a buyer getting cold feet, changing their minds, being unable to source finance, etc, etc.  This year was different in one aspect in that when those Contracts did not complete, in many cases another buyer has almost immediately seized the opportunity and gone to contract on the business, and completed.  This has been another very positive sign of the market strengthening.

The year ahead will continue to see many excellent buying opportunities become available however we see this buying window of opportunity being squeezed as time goes on.  Last year we mentioned cheap finance being available.  This is still the case however many have not been able to access this finance on the back of some financiers having a blanket policy of not wanting to offer finance in certain regions.  Many good financing opportunities have therefore been lost even when the downside risk was minimal.

2018 looks to be very positive moving forward for the motel industry and we expect demand to increase with an improvement in values.

The Right Size

Written by Andrew Morgan, Specialist Motel and Accommodation Broker

Some say the more you have, the more you have to sell.  Some prefer more than 25, others prefer less.  How a motel is to be operated is most likely the answer to any question around how many units is the optimal amount.  If a motel is to be owner operated or if it is to be run under management, this may determine how many units are needed to make it success in the owner’s mind.

If a motel is going to be operated under management then the management wages are going to need to be accounted for.  If the profit after management is not enough then perhaps the size of the property is too small for what the owner is trying to achieve or maybe the business is just not trading well enough at that time and can be improved.

The number of units in a particular motel is not the defining factor for success.  Business ownership revolves around profitability (amongst other things) and what profit can be achieved from the number of units on site comes down to how many of those units can be sold each night and at what tariff.  The number sitting there on a property is relevant when they are all being sold each night or not enough are being sold.  If the property is running at 100% occupancy then room rates need to increase to bring that overheated rate down.  Alternatively, if not enough units are being sold then Council Rates, Insurance and other costs are being incurred on non-income producing assets, the opposite issue.

In the past many people would say that a minimum of 16 units are required for a motel to be successful.  But one problem lies in the definition of successful.  It really comes back to what an owner is looking for as a goal for occupancy rates, income, profitability or lifestyle.  An investor buying a motel may wish for a minimum Net Profit of say $100,000 after management costs.  This figure/level may be that investor’s definition of the motel being a success.  The number of units required to produce that result may be of no real consequence.

Where did the figure of 16 units come from?  Most likely there is no real factual basis for such a comment.  I have never seen any evidence to support this.  In contradiction to this figure I have seen many motels over the years with less than 16 units produce very strong levels of income and profit.  One example in particular included only 9 units yet produced a Net Operating Profit of in excess of $250,000.  Impossible some may say but 9 units at 90% occupancy at $130 per night produced an Income of approximately $384,000 and operated on a Net Profit Margin of 64%.  These are better than industry average figures however it was a difficult yet achievable goal that was reached.  Therefore a generalised comment on how many units are required to be successful or not, is in any case difficult to agree with.

If we consider two very different motel investors then the answers will be very different.  One who is buying to operate themselves as a husband and wife business may be happy with 10 units, three bedroom residence and no restaurant.  The other may not want to operate the business themselves, thereby having it run under management.  They may require 30 units, licenced restaurant, conference rooms/facilities, and a one bedroom residence.  Each business may be very successful in its own right and own market, however the individual investor’s requirements will determine what makes that motel successful compared to another.

In general terms those who operate their business under management often request a minimum of approximately 20 - 25 units, however this can vary.  Those choosing to manage the motel themselves may only require as few as 8 units.  The decision on this will be answered by one’s goals or motives, such as what minimum profit level they require after all operating costs have been accounted for, whether they are buying a motel that is operating well or one that is struggling to perform, and what their borrowing capacity is and therefore loan repayment responsibilities.

Often if a motel is being purchased to operate under management, a Net Operating Profit of for example $100,000 may not be sufficient, due to the manager’s wage being taken out of this profit figure and loan repayments also to be deducted.  The level of profit remaining after the manager’s wage may not be sufficient to make loan repayments and leave a satisfactory surplus.  A common Net Operating Profit figure worked on by many motel investors is $200,000 after Management Wages have been expended with loan repayments yet to be made.  The number of units required to achieve that is often a secondary thought, as a minimum level of profit was the driving motivation.