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Motel Leases - Start to End

Andrew Morgan - Monday, May 15, 2017

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.