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Maintenance for a Rainy Day

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers
First Published in Resort News Magazine

This discussion has come up several times over the years, but for a number of reasons even more so over the last month or two.  One reason it has been raised is due to a number of new leases being discussed and put into place.  The discussion is regarding maintenance of a motel that is to be leased.  Who pays what and how can the current system be improved?  What happens when a major refurbishment is required?

Any issues Lessees and Lessors have had over the years largely comes down to neither party investing back into the property, both parties expecting each other to cover the cost.  Then when a major refurbishment is due, either a lack of provision within the lease dealing with that is a problem or a lack of enforcement of the terms of the lease, means the refurbishment never gets done.  To go a step further it may be dealt with in the lease however in practical terms it does not happen because neither party has the funds (or claims not to have the funds) available to do so.  As a result, the property gets older, more tired and the eventual cost to refurbish continues to climb.

There has historically been a “maintain the AAA rating” clause and a “redecoration” clause within motel leases that in summary says that the Lessee is to do anything required to maintain the rating and paint the interior, exterior or both every five or seven years.  Even though this is included within leases and is often not clear as to exactly what is required and by who, it is often not carried out for various reasons.  One of these reasons is cashflow.  This is often an issue for major works.  It is easy to see how finding a large sum to cover a major refurbishment or even just exterior painting is going to be taxing on any business owner or investor.  Motels are generally large properties and exterior painting as an example is often a substantial cost item.  Therefore, forward planning and budgeting is required considering everyday expenses still need to be paid.

One possible solution to solving the problem of accommodation properties falling behind in the quality and standard expected by guests today should be a collaboration.  A partnership if you will between the two parties who have a vested interest in the property.  The use of the body corporate industry model of a “sinking fund” type of situation within the motel industry, to go one step further.

Such a system would involve both Lessee and Lessor contributing either a fixed amount or percentage of turnover each month into a specific account (forced saving for a rainy day in a sense).  Both parties with a financial interest in the property’s presentation are contributing to the future prosperity of the property and business.  It takes away the issue of any owner taking and taking and then moving on thereby passing a growing issue onto the next owner and the next and so on.  With any system there will be issues and collective decisions between both parties that need to be made, however no system is perfect.  Perhaps very specific stipulations for how and when the “sinking fund” money is to be spent will avoid some of those potential issues.

Another benefit is that the cashflow issue is resolved, especially if it is done on an income percentage basis rather than a fixed amount.  The big expense when the time comes will not create a cashflow issue either as the sinking fund can either be spent or used to borrow the funds required.

The only reason the discussion of maintenance continually comes up is because one or both parties act unreasonably.  The past situations of Lessee’s and/or Lessor’s in the motel and accommodation industry being not interested in spending a cent on their properties, as hard to believe as that is, has only served to stifle the capacity of those individual properties to produce as high an income as it possibly can.  Therefore, its ability to continue to pay an increasing rental to the property owner and provide a good profit for the business owner/operator.

That Most Important to the Guest

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers
First Published in Resort News Magazine

What is the most important thing in the mind of a guest staying in a motel?  Is it one item or issue or a number of things that all carry a level of importance?  Well every guest’s requirements and matters of importance are going to be different.  What can one focus their attentions on in order to have the guest come back next time they are in town, recommend the motel to everyone they know and write a great online review.

The first thing that stands out is that when the guest leaves the property after their stay they are happy and have no legitimate grievances.  I say “legitimate” because some people can never be satisfied no matter how much one does to keep them happy.  Every accommodation provider would know a past guest who fits into this category.  Anyway moving on…….

There is a lot to do to try and satisfy every single customer that stays.  Whether it be working out exactly what is most important to that individual or what is going to keep them happy, through to keeping the larger guest base satisfied.  What is it that can be done to satisfy as many guests as possible as well as each individual’s needs?

The small list below (in no particular order) is an attempt to limit some of the main things guests see as their most important matters when staying in a motel.

  • Good night sleep – this covers a range of topics however the overall experience of a good night sleep is paramount to a guest no matter what the reason for travel - work, family, holiday, etc.  Everyone wants a good night sleep to be able to function at their best the next day.
  • Reception greeting – how one is greeted at reception when they first enter the property is almost a first impression.  Good or bad first impressions always last.
  • Ease of check in and check out – how quickly and easily this process is handled, especially when one is busy to get to the first meeting of the day or get on the road.
  • Friendliness – how the guest is treated by the owner/manager/employees of the motel reflects on the entire business.  Feeling welcome is important to everyone no matter what the circumstances or environment.
  • Value for money – feeling as though one has received good value for their money is high on anyone’s agenda.
  • Bed comfort – was the bedding of a good standard or did it sag in the middle?  The quality of the bedding is always going to be a high priority for a guest.  Without this all other dot points mentioned are irrelevant.
  • Noise level – noise from the next-door unit, outside the unit or external noise from the road or street is going to create an unavoidable level of noise.  I think the question is whether or not that unavoidable noise is at an acceptable level.  Each guest’s level of tolerance will be different but trying to keep that noise to an absolute minimum is the best one can expect.  Sound dampening methods and products work well but vehicles screeching tyres or kids running back and forth along a veranda are going to be too much for whatever one implements.
  • Cleanliness – Again always paramount to any guest’s minimum accommodation requirements.  No matter what else happens, a unit that has not been cleaned fully and correctly will have a devastating and most likely irreparable issue for a guest.  In that case expect an unpleasant online review and to never see the guest again.
  • Room servicing – often open to the expectations of the individual guest.  Some people expect servicing each day others expect less.  Length of stay will play a role here also.
  • Facilities – again what is important to one guest will not be important to another, such restaurant and bar, conference facilities, breakfasts, meals, swimming pool and BBQ facilities, Wifi, outdoor seating, pay tv and laundry facilities.
  • Carparking (Undercover or Off Street) – this is very important to some guests and no so to others for different reasons.  Work vehicles in some cases are required by the company to be parked off the street.  Other travellers do not wish their cars to be uncovered, even for one night.

With all the different requirements of guests it really is a difficult (or impossible) thing to try and please everyone.  Making sure those main items that are an issue for everyone such as cleanliness and bedding are in order is a good place to start.  Getting those right is going to go a long way to keeping the majority of customers coming back.

Motel Management

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers
First Published in Resort News Magazine

The demand from the accommodation industry for managers ebbs and flows.  Three years ago demand was very strong, then dropped off for a while, however has had a resurgence in 2017.  How the industry is performing has a lot to do with this.  If business is good often an owner will look to step back and take more time for themselves without having the financial pressures weighing on them, therefore working as hard as possible to repay loans, etc.  If trading drops off then cost cutting measures are then re-employed and often going back in to operate the business oneself is at the expense of the manager.

Buying motels with the direct intention of having them operated under management by competent and professional management couples or individuals has increased in recent months with many people enquiring to buying expressly stated their intention.  The ability to own a successful motel business from afar, without having to operate it is available.  Professional management is often comprised of a husband and wife team or individual who is experienced in operating motels and who have a genuine interest in improving the trading performance of the motel over and above its current trading.  Sitting at reception and trying to look busy is of no interest for them.  In the past it was the “norm” to enlist anyone who said yes to the question and the owner’s expectation was that this arrangement would work.  In many cases it did not work and it ended up resulting in motel managers in general receiving a bad rap.  Managers were often labelled lazy, incompetent and in some cases dishonest, if the business did not perform as well as it had in the past.

Some of the mistakes of the past are still being made however. The old saying still rings true that “if you pay peanuts you get monkeys”.  The manager’s remuneration is dependent on a number of things including experience, roles, performance, skills, etc.  If a manager feels they are being underpaid, it is highly likely their level of service (in a service industry) to the business and guests will be diminished.  This results in a poorer motel operation and damage to the business’ reputation and performance.

Remuneration packages for motel managers are generally determined by the market and the negotiation process between the Owner and Manager.  The type of motel involved and particular work required to be completed by the Management Team will affect the package offered.  Is the management team required to manage the property, cook, clean, complete the accounts, etc?  This will be different from one motel to the next depending on the size of the property, whether there is a restaurant onsite, the location of the property, and the requirements of the Owner.  Is there a food and beveridge allowance built into the package for the management team?  Management packages can be fixed salaries or in many cases are a fixed salary plus a bonus system based on the achievement of certain goals, such as reaching a sales income target or profit target for a particular period.

Many motel owners in recent times have owned and operated a motel for a period and have then decided to acquire another.  Obviously one cannot be in two places at once, hence placing one or both of these businesses under management.  The owner then takes the role of overseeing both businesses and relief managing as required.  One can never take the attitude of set and forget and staying involved in a supervisory role over management is prudent.

The main type of manager is the permanently employed manager or Contractor however the other type of manager often more highly sought after by moteliers is the relief manager.  This is more of a short term posting to allow the owner time to get away from the business for a short break rather than a more permanent arrangement.  Between a couple of days and a couple of months is usually the relief managers term and this type of short term relief management can be very valuable to a business owner.  Allowing them to get away and recharge their batteries, clear their heads and come back to work ready to go ahead, thereby avoiding possible burnout.

The motel industry is a service industry, and if a high level of service is not provided, the customer will take their business elsewhere.  A common complaint is that some managers will not go the extra mile to look after a customer, such as doing those little extras that make a customer feel looked after and wanting to return.

First time motel owners are fewer in the market at present and experienced owner/operators are the most active in seeking out motel business opportunities.  Generally first time owners will operate the motel themselves and are less likely to put a motel under management, at least until they have a good understanding of how the business and motel industry works.  The result is a higher demand in today’s market for the professional management team.

Meeting the Market

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers
First Published in Resort News Magazine

No matter what one is selling the market will always dictate the price.  The product that sits on the shelf and never sells does so because the customer cannot see the value in the product at that price.  The same goes for a business and in this case a motel.

Anything will sell once the price meets the market.  Trying to tell the market “here is the price like it or leave it” essentially means if the market does not like that price the product will be left on the shelf.  The value of anything goes up and down depending on the individual product and the market it is in.  If the market is very strong with a high demand then the value will go up in line with the demand.  If the market is low with a low demand then the value will go down in line with this demand.  Not as many buyers for a product means not as high value.
Once the decision is made to sell a motel one needs to determine an accurate price to offer the business to the market based on the current market conditions.  No one ever wants to undersell their property and on the other hand too higher price means no buyer interest and the property will not sell.

Achieving the highest price possible is any Vendor’s goal, however stepping over the line and pricing too high is a major problem.  A successful sale transaction for most is selling at the highest possible price in the current market.  Whether the market is high or low a good result is selling at the top of that particular market.  One step in achieving the best sale value is to read the market correctly.  Very easy to say but not so easy to do in practice.

Taking the stance that 12 months ago or even 3 years ago a motel was worth $2m and therefore it must be worth $3m today is fundamentally incorrect.  It may be the case that it is worth more, or that the value is now less than it previously was due to the market being down, financial trading of the business having declined, etc.  Depending on how you look at it, the good and bad news is that real estate and business values fluctuate up and down.  Over the long term property values do in general terms increase, however the market does fluctuate and it can move up and down in very quick time depending on particular market conditions.  A business’ value can fluctuate much faster than real estate as the value is largely determined by the most recent financial performance.

One must do their own research and come to their own conclusions of value based on all the collated information, in order to avoid any potential pitfalls.  Some of these pitfalls may include sales evidence that was not an “arm’s length” transaction, or incorrect information (or lack of information) that an agent may have provided.  In the situation where an agent tells a seller “what they want to hear” regarding the value of a business/property, without any regard to the true value, in order to gain a listing does not benefit anyone involved and ultimately damages the market’s perception of the business.  The way to protect one’s self from this is to arm yourself with information on genuine recent sales of a similar nature, what is currently available for sale, how does this motel compare and general market information on what may affect potential buyers assessments of value, such as interest rates rising or falling, access to finance, locality issues, etc.

Generally if a motel is available for sale on the market without selling within a “reasonable” marketing period then it has not been priced correctly for the particular market conditions.  This situation should not occur if the motel was marketed fully and the Vendor’s and Broker’s price expectations were accurate.  After an extended period of time the business will be seen by the market as potentially having a problem with it due to it not having strong enough interest for a sale to be finalised.

In summary a successful sale at the highest possible price will not be achieved by sitting on the market for an extended period of time.  All that will happen is the price will come down and down over time until eventually it sells below the market level.  Meeting the market within a reasonable time frame is the best way to avoid this.

Motel Leases - Start to End

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers
First Published in Resort News Magazine

Over the years the most popular discussion topic relevant to motel leases has been what rent levels should be.  Yes this is an integral part of the lease however another which is just important but does not often get the attention that rents do is the term or length of the lease.

One of the many essential terms of a lease is the length of the agreement.  Leases in nature have a start date, end date and a consideration.  It is reasonable to believe that the longer the term remaining on the lease, the stronger the position/security of both the Lessee and Lessor.

More often than not motel leases will commence with a ten year term with three or four by five year option periods.  It is very rare to find new motel leases commencing any lower than twenty-five years in total and most generally commence as a thirty year lease.  This has changed over the years, with leases commencing as twenty year leases back in the early and mid 1990’s.  New leases then started to be entered into at twenty-five years in the late 1990’s and then progressed to where they are now at thirty year terms.  There have been a few instances over the years where 50 year leases (split up into ten year option periods) have been entered into.  These however are in the minority.

The value of a motel business is affected by the tenure remaining on the lease over the property.  For example, a motel business with a five year lease remaining with no prospect of extending the lease would not be as valuable as the same motel business with a twenty-five year lease remaining.  Many motel buyers seem to require twenty plus year leases, or if the lease has less than twenty years remaining, the possibility of extending the lease back to in excess of twenty years or more.  Back in 2009 when I originally wrote about this topic the minimum lease term required by the market was twelve years.  Expectations have changed considerably in that time.

What period of time dictates whether a lease is long term or not?  It is often said that a fifteen year lease is not long enough and an extension is required.  This is difficult to understand.  If one rents a shop or office space to operate a business from it is generally a three or five year lease with maybe the equivalent as an option, but this is not always the case.  If a three year x three year lease is satisfactory in the case of a corner store, why is a fifteen year lease in the case of a motel not long enough?  A motel business is limited to where it can be operated from, as is a corner store.  Ten or fifteen years would seem to be a long time in anyone’s terms.

In the case of extending a motel lease, this is a common occurrence.  Lease extensions are a saleable commodity in the market place.  Most Lessors whose lease term has run below 15 years, will have been asked at some stage by a Lessee to extend the lease.

Lease extensions are generally handled on the basis that the Lessor and Lessee agree to extend the lease by adding a further option period into the lease.  This can be done by gift to the Lessee or by the sale on a per year added basis.  The market dictates the dollar value for the sale of lease extensions, and the sale range seems to be anywhere between $0 - $8,000 per year extended, depending on how many years the extension will be.  The only time I have seen lease extensions be rejected by Lessors is when the land the business sits upon is not being utilised for its highest and best use.  For example when the property is beachfront, CBD or riverfront situated.  The land’s highest and best use may be for something other than a motel and it therefore may be considered for redevelopment in these instances.  In this case a Lessor may be reluctant to extend the lease.

For Sale Inspections

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers
First Published in Resort News Magazine

The simplistic side of this part of the sale process is that a potential Buyer wants to look at the good, the bad and the ugly.  The Seller wants the buyer to have a quick look around, say yes they will buy it, and leave so as to avoid an employee or customer finding out that they are selling.
Many potential Buyers are concerned only with having a thorough look through a motel property and do not consider at the time that the Motel Operator is running a business.  It can be an awkward situation when the Seller, Broker and Buyer are talking about sensitive business specific information and a staff member, customer or supplier walks through the door.  The busiest times of the Motelier’s day are therefore simply not suitable for conducting an inspection, and all parties need to be acutely aware of the sensitive and confidential situation that they are in.

Preparing for the Inspection
The Motel Broker’s role is to set up a mutually suitable time for all parties for an inspection of the property, taking into account the busy and quiet times of the particular motel business.  These busy and quiet times will vary from Motel to Motel depending on the type of clientele and income departments the business has.  Buyers will inspect a motel at whatever time suits them, however from the Seller’s point of view, for much of the day, it is inappropriate to carry out a thorough inspection.  These times may include, when the operator and the employees are busy, or when customers are checking in and out.

In most cases the motel is always on show and therefore should present well for an inspection on any given day.  If the day or night before was a busy one then the property should be prepared to present as best as possible and as clean and tidy as it can be.  Any repair items should be attended to or raised during the inspection with the intention that they will be rectified as soon as possible.

Inspection Expectations
The percentages show that by far and away most Buyers do the right thing when it comes to an inspection.  There are however some Buyers who will not.  Some will arrive on the doorstep unannounced and want to look through the property.  This will no doubt be at a completely inappropriate time of the day, such as when guests are checking in or out, when the owners are away, or when the Broker has not been advised that they were going to attend the property and the Buyer then talks directly to the employees.

Other Buyers will stay at the motel as a guest, having a look around without disturbing anyone.  Some will unfortunately ask employees questions directly and alert employees to sensitive business details.  I once witnessed a Buyer whilst inspecting a motel, stop and start ask an employee direct questions about the property and business.  This is of course completely inappropriate and lacking in common courtesy.  Thankfully I have only seen this happen once in the last 13 years, however once was enough.

Sometimes when a motel is operated under management a Seller will not want the Manager to find out the business is for sale.  It has been found many times over that the best policy from a sale point of view and from an employer to employee point of view, that everyone is honest and upfront with one another.  The Manager will find out one way or another so it is best it comes from their employer first.  Plans can then be put in place between both parties to ensure that when the motel does sell each party walks away on good terms.  In many cases the manager is often re-employed by the new owner.

Seller’s Role
The Seller of the motel business can be involved in the physical inspection or can leave it to the Broker to show the Buyer through the property.  This is up to the individual Seller, as some prefer the Broker to handle this and others prefer to be there to assist in showing the property.  This being said, at all times the Broker should be in attendance at inspections and should control the inspection so that there are no unexpected problems that arise.  There are many important reasons for this which can be covered under the broad headings of financial, legal and communicative reasons.

The Seller should be as transparent as possible and allow the Buyer to look as in depth as they wish throughout the entire property.  Obviously due to stay-over customers it is not possible to inspect every room within a motel.  Most Buyers accept this and are mainly interested to look at the different styles of unit that make up the complex.

When a Buyer inspects a Motel they are looking for any faults or flaws they can find whether it be with the building or the books.  It is the Seller’s responsibility to present the property in its best light, free of repair and maintenance or financial issues.

Accommodation Mark Up

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers
First Published in Resort News Magazine

When we hear the term “Mark Up” we think of the amount added to a product on top of the cost in order to make a profit.  In the case of motels or accommodation businesses the product is the unit being rented.  The cost to rent that unit needs to be calculated to be able to determine a suitable “Mark Up” to achieve a profit.  That point at which a profit or loss will be made if that room is rented must be known.  It is easy to think of a product as an item on the shelf at the supermarket however less obvious to look at a motel unit as a product.

The addition of a mark-up to make a profit and still be competitive determines the price the product/service should be offered at.  The product of the motel unit and associated services costs the operator to rent the unit in wages, cleaning products, laundry/linen, electricity, insurance, rates, 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.

A motel owner commented recently that he could not work out why there was no money in the bank when they were selling a lot of units.  He realised when he looked at their operating costs that the tariff they were selling their units at was only just covering the cost to rent them.  He then sat down and went through the process of working out the breakeven point to sell each type of unit they had to offer.  The bigger the unit and the more services in the room such as kitchen facilities, beds, etc, the more the cost to rent that unit.

Each different accommodation facility 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
Size of Units – the square metre area that the unit occupies.  A standard studio unit costs less to occupy than a 2 bedroom unit.
Self-Contained – cleaning costs alone to rent a self-contained unit can be substantially higher
Age of Property – 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, air conditioners, 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?
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 higher 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
Telephone/Internet – what type of phone system does the motel have?  Is it reliable in its charging of customers?  Is WiFi installed?
Land Tax – is land tax paid by the property owner, lessee or not applicable?
Insurance – the cost to insure properties has increased substantially

Costs add up very quickly for any business operation.  They need to be contained and at the same time be continually monitored.  Knowing what the costs are leaves an operator confident that they are selling their product at a profit rather than at a loss.

Tips for Buying Motels: A business and lifestyle in one

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers
First Published in Resort News Magazine

A motel business offers many benefits to the owner and what interests one person may be completely different to the next. The opportunities that one sees in one motel compared to the next are also very different. It may be the quality and flexibility of lifestyle available, the high return on capital, potential for substantial capital gain, living on site, or a combination of all these. Often a motel will be acquired on the basis of operating it for a few years, then selling on. Many, however, sell on and then look for another motel, perhaps a larger motel, or one with a restaurant, or one with a higher turnover and profit. There is a large number of motel owners within the industry who have owned and operated many different motels over the years. They have been very successful in the motel industry and enjoy a good working lifestyle whether it be on a full-time or very part-time basis.

A few of the benefits of owning and operating a motel include but are not limited to the following:
High return on investment – for the capital invested in a motel a high return is achievable. Leasehold, freehold and passive investment tenures offer the investor a very high return on investment. When considering risk versus return, the statistics confirm motels are a safe and secure business to invest in.
Operate under management – the motel industry is ever evolving and a large number of motels today are operated under management. This is the complete opposite to where the industry was 18 years ago where whoever owned the motel lived on-site and operated it themselves. If the day-to-day operation is not desired, then this can be a great way to get involved in the industry on a more passive basis yet still offers the ability to stay involved as much or as little as one wants.
Quality lifestyle/flexibility – if planning to operate a motel, the actual purchase is not only a business decision but a lifestyle choice also. Motels offer a good working lifestyle for the operators, with the whole family able to live and work together on-site, and the meeting of new and interesting people each day
Residence/home – motels almost always offer an on-site residence for the owner, which helps to reduce their living costs substantially, including food, electricity, council rates, insurance, telephone, etc. One must be prepared that motel residences were never built to be stand-alone houses and therefore to not have the space of today’s popular four-bedroom, two-bathroom house in the suburbs.
Active market – there is a ready market when you wish to sell, as there is always a market for people wishing to buy good motel businesses.
Stock on hand – there is a small stock component within a motel, whereas in other business types a large amount of stock is required to be carried at all times.
Cash flow – the first day of taking over a motel there is generally a good cash flow. Most guests today pay by credit card or Eftpos and guests on account are limited to large companies only. Many large companies have now taken to providing key employees with credit cards for their accommodation requirements thereby limiting accounts even further.
Capital gains – there is always an opportunity to increase the value of the motel and make a capital gain upon sale depending on the quality of operation. The trend of motel values over the past 20 years has been a steady and consistent rise in values that has generally resulted in good capital gains. As with any market, it does fluctuate so timing is still very important.
Finance – banks and financial institutions are generally eager to lend money for the purchase of motels. Traditionally, motels have been a solid and secure investment, whether leasehold or freehold, and this good history gives financiers confidence in lending to purchase motels.
Tax benefits – there are numerous taxation benefits available to motel owners such as depreciation of plant and property, living cost benefits, etc.

Return on investment
The market determines the return on investment of a motel. There are numerous matters that affect the rate of return in the market. The fact that each motel is different means at times it is difficult to compare one to the next.

Some of the factors affecting return on investment include:
Location – whether a motel is located on the coast or inland is a major factor determining the return on investment. Historically, the demand for a coastal motel will be higher therefore pushing the value of the motel higher and the return on investment lower. Location is an important factor to consider when buying a motel, decisions on where to buy a motel can be based on lifestyle or return. It must be considered that motels in desirable locations such as coastal areas will not show returns to the level that an inland motel will. Inland locations may not seem as desirable from a lifestyle point of view as coastal locations (to some); however, there can be substantially higher returns by buying a motel in an inland location.
Condition or standard – if a motel is in poor condition, requiring repairs and maintenance or refurbishment, the market will expect a much higher return on investment than a motel that does not require this. Poor presentation affects the value of a motel considerably. High quality motels are always in demand and, as a result, achieve sales on lower returns or higher prices.
Age of buildings – a newer more modern building/motel will be in higher demand than an older building/motel and will therefore sell on a lower return or investment. This does not mean that older motels will not achieve a low return. It will depend on how they have been maintained, when bathrooms were refurbished, etc.
Size – a smaller motel traditionally sells on a lower return on investment, as there can be more competition for these motels within the ‘Mum and Dad’ sector of the motel market due to affordability.
Operational factors – this covers a wide area relating to the business operation itself such as the type of clientele the motel attracts, profitability, sales revenue, income departments such as accommodation, food and beverage, etc., and the sustainability of the business going forward, just to mention a few.
Potential for adding value – opportunity to improve a motel operation is of significant interest to many if not all motel investors and is often available where the next owner looks at a part of the business with fresh eyes and perhaps sees an opportunity. This opportunity may be a buying motive that affects the return on investment. Are there areas of the business that are underperforming? Where can improvements be made over and above the current operation? Keep in mind that almost no motel business ever operates at its absolute full potential and there is always room to improve with fresh ideas and renewed marketing strategies.
The above items all have a role in the return on investment that a motel investor wants to achieve to satisfy their buying motives.

Leasehold versus freehold
There are many factors specific to both freehold and leasehold that are a consideration for buying one or the other.
Freehold
• Size of land component;
• Spare land for expansion; and
• Value of the land itself.
Leasehold
• Annual rental;
• Lease terms – the lessee and lessor’s responsibilities; and
• Length of lease.
What will suit the individual, is the answer to whether a freehold or leasehold motel is the most suitable. Throughout the early-to-mid 1990s, motel operators were only interested in buying freehold and leasehold was very much in its infancy. In today’s motel industry; however, the benefits of leasing are highly sought-after by the broader market who are trying to achieve a higher rate of return over a shorter timeframe.
Many choose to buy leasehold today due to the lower capital outlay required and the higher return on investment, in many cases double the return a freehold property offers. The ownership of freehold property still attracts a wide market that does not want to pay a rental and who have a future intention of leasing the property to retain as a passive investment. This is a highly sought-after investment strategy for many motel owners. A large number of investors have succeeded financially from the motel industry over the years and continue to buy, sell and accumulate motel properties.
How much cash (or equity) one has available will also play a major role in determining whether leasehold or freehold is the best option. A cash component of $500,000 will allow you to buy a leasehold motel up to $1,000,000. This will generally be a 20+ unit motel of good quality, with a net profit after costs of approximately to $300,000 p.a. - $320,000 p.a. On the other hand, the same cash component of $500,000 will allow you to buy a freehold motel up to $1.5 million. This will generally be a 14+ unit motel of good quality with a net profit after costs of up to approximately $210,000 - $225,000 p.a. These details and numbers are generalised, as they are dependent to a large extent on location, standard of quality, age of buildings and income per annum.

Due diligence
It is recommended no matter what type of business you are buying that a due diligence is completed to the buyer’s complete satisfaction. Some buyers do not require a due diligence, and this is fine, as it is up to each buyer to decide what they require. Most who do a due diligence employ the services of an accountant who has handled motel due diligence reports previously, and is a specialist in the motel field. A due diligence is mainly completed to confirm that the business is performing as presented, and to give the buyer piece of mind that what they believe they are buying is actually the case. Motels have a number of ‘tells’ as far as whether or not they are performing as presented in the financial statements. Therefore, it is not difficult to do a quick check from the outset as to whether or not one believes the data appears on the surface to be accurate.

Building and pest inspections
Building and pest inspections of motels are generally only requested by purchasers of the freehold property of a motel. It is rare that the purchaser of a leasehold motel will include a requirement for a building and pest inspection. A thorough inspection of a building by a licensed professional is a good idea if there is some doubt over the integrity of the structure and/or pest infestation. Minor issues are generally of no consequence to most people and a report is only required if there is a real reason for concern. Often, buyers satisfy themselves of the buildings integrity.

Utilise the services of professionals that specialise in the motel industry
The use of suitably qualified and experienced professionals is a decision, which can make life either very easy or very difficult in the motel purchase process. To have an accountant, motel broker, solicitor and financier who specialises in the motel industry is extremely important in the transaction. Many times I have seen inexperienced or unqualified ‘professionals’ handling motel sale and purchase transactions for clients and it ends up becoming more difficult and frustrating for all parties than it needs to be. It also ends up costing a lot more money. Most people are very excited about moving into their new motel and too often the process can be soured by not utilising the services of specialists in the industry. A simple example is enlisting a residential sales agent to sell a business. It is highly recommended to consult with the parties you are about to deal with in order to confirm their suitability for the job.

2016 Motel Market Wrap Up

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers
First Published in Resort News Magazine - December 2016

Things are always changing and 2016 has been no different.  The year has been an improvement in the motel industry over the previous year with quite a few ups and downs throughout.  In summary it has been a year where the first quarter was quiet and we looked forward to the winter months.  The second quarter did not reach expectations and again we looked forward.  Moving onto the third quarter activity started to build and has continued to improve since then, ultimately finishing off the year quite strongly with increased activity across the board.

I repeat my comments from a year ago, that prosperity has been largely dependent on where one is located.  Again particular areas of the state performed extremely well, and others have continued to struggle with low levels of demand for accommodation.  The stream of additional competition coming online in areas of low occupancy has pretty much come to an end with limited new complexes being built as the lag of previously approved developments was finalised as the demand well and truly ceased to warrant it.

The tourism sector has continued to grow with Far North Queensland showing good signs of improvement.  Hamilton Island in the Whitsundays has reported occupancy rates in the 90’s for the last couple of years.  The Australian Dollar has increased slightly however still seems to be maintaining that mid 70 percent mark.  Overseas tourist numbers have continued to increase and many in the accommodation industry have reported increasing occupancy rates as a result.  New tourism initiatives and more focus and support for the sector has been positive to see however it also needs to be an ongoing policy.

The contraction of the Mining Industry that has received so much continued media coverage and has affected much of regional Queensland has levelled off, and in many areas spending and confidence in the regions and industry has been building.  Coal prices have increased and companies associated with the resources sector are starting to employ more people and investing, which then flows on to confidence from the people within those regions and those looking to expand the business interests.  This of course flows on to higher demand for accommodation from those increased traveller numbers.  Again the highs that the resources sector delivered at its peak will not be seen again for quite a while, if ever.  Any improvements in the industry will be welcomed by all who have experienced the highs and lows and the way the accommodation industry works within that sector, will be more experienced and cautious as demand increases.

Discounting of room rates to attract guests through the doors by new complexes is subsiding slightly.  It is however still a work in progress as some older complexes unfortunately follow suit to try and fill rooms at unsustainably low room rates.  A number of long term experienced operators are taking the opposite approach, and now that demand is starting to improve are lifting their room rates.  They are happy to lose a particular segment of the market to focus on a higher standard position.  These operators know from their experience that discounting heavily cannot last and that growth in the industry is impossible whilst high levels of discounting are being utilised as a recovery strategy.

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.  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.  There is however always a market for a well presented motel business that has good fundamentals, a good client base and is priced correctly.

The leasehold market has seen large and small motels changing hands when priced to meet the market.  Buyers have been investing in good motel opportunities when they become available.  Those that tick most of the boxes.  Again many Vendors have had to sit on the market without much activity when there has been unresolved issues, for example, high rent, short term lease, unreasonable price expectations.

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.

2017 going forward will continue to see many excellent buying opportunities become available with very cheap finance on offer.  Many first time operators and experienced investors will start to enter the market as confidence in the market continues to grow on the back of 2016 finishing off strongly.

How Quickly Market Sentiment Can Change

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers
First Published in Resort News Magazine and accomnews.com.au

It really is extraordinary how things can change so quickly, for the better, and also unfortunately for the worse. I guess one does not exist without the other. Human sentiment and feeling about a particular matter or situation can change the course of activity almost in an instant. As an example the share market depends on the sentiment of investors for the gains or losses that are experienced every day. Good news in some fashion equates to gains and bad news equates to losses. The change is day by day and from one extreme to the other.

How this relates to the accommodation industry has been easy to see with the economic slowdown witnessed in the greater Central Queensland and Bowen Basin regions since late 2012. The contraction of the resources sector which has affected this area so badly is well known. The region (which covers a major part of Queensland) and its associated industries, including accommodation, have experienced a massive amount of doom and gloom and negative market sentiment. It is very easy to focus on the negative rather than the positive across all sectors.

There have been various times when it has been mentioned that the bottom had been reached, and then business activity and traveller numbers contracted further. Now many across all sectors of the economy are saying again, we have hit the bottom. Why should it be any different now than it was say 6 months ago or 12 months ago? Well this time the pressure is building, people have been coming out of the doom and gloom attitude for a little while now, and the increased positivity seen is infectious. Again it all comes back to how quickly things can change. The word being spread now is we have hit the bottom, and activity is improving.

This time it is not based on hope but solid facts. The price of coal is going up and as a result mines are preparing to re-open. The state government has given Adani's $21 billion Carmichael Coal and Rail Project in the Gaililee Basin Critical Infrastructure status, the first mine ever to receive this government green light.The spending levels (hence confidence) of the people is growing in these regions. Car dealerships report that more new cars are being sold in the last few months than in the corresponding periods during the last 4 years. Discretionary spending is increasing. The residential property market is seeing more activity now than in recent years. Occupancy rates for short term accommodation in many areas is improving and surprisingly quickly.

Being four years down the track from the commencement of the downturn in the resources sector the feeling is enough is enough, it is time to get on with the job. The hard and unforgiving lessons learned from the heavy contraction in the mining industry in these regions has meant that industries will be more careful and selective with whom they do business and how they plan to expand their market share. It is expected the economies in these regions will, and already are heading back to the good old days where industries that many towns were built on (such as agriculture, cotton, grain, sugar, grazing, small crops, etc) will grow, and mining is also expected to increase. This time however, it will be on a more manageable level and it will sit nicely as another industry within more stable and equitable local economies.