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Location Location Location

Written by Andrew Morgan, Specialist Resort & Motel Broker

Question: What is the best location for a motel?  Inland, coastal, north, south?
Answer: All of the above.

Question: What is the best position for a motel?  Highway, CBD, Suburbs, Beachfront, Riverfront?
Answer: All of the above.

It depends on numerous variables and on each individual property and business.  Of course there is no “best” location for a motel.  All the things that go into making that business or property what it is, such as location, presentation, the operator, the standard of beds, the local economy, the services provided, marketing, etc, etc, all play a role.  

There may be locations where the economy is performing stronger than others at one time or another.  Certain positions within a locality may also be performing better for specific reasons.  I have been asked the question many times in the past, as to where the best place is to buy a motel.  There is no one answer to this question.  I guess timing plays a part here also as mentioned with fluctuating local economies and how they are performing.  An excellent example of this is Mackay.  It performs extremely well until the resources sector had a downturn.  Now the local economy there is improving very well.  Hence why many experienced motel investors are now taking their opportunity to buy back into Mackay.

I often have enquiries from people wanting to buy their first motel and invariably they want to limit their search to one town or location.  This is fine when buying a house as the decision is largely based on where they need to live for employment, family or retirement purposes.  When buying a business, limiting one’s search to where they want to live disadvantages them considerably.  It is the best way to buy an unsuitable business, as it is based on the wrong reasons.

One should always be looking for the best business that suits their requirements.  Therefore, if return is the driving force so be it.  If the type of business is, great.  But limiting a search for a motel for example to one area, means the best business opportunity for them may end up being written off as an opportunity lost.

This does not mean going and buying a business that is, location wise, completely unsuitable for family reasons or another.  It simply means don’t limit one’s self.  Keep the options and possibilities open.  Explore different areas of the state that may not have been considered suitable.  A lot of the time people end up finding the perfect motel for them was not what or where they had considered going at all when they first started out looking.

A common objection we hear a lot is that someone years ago in their infinite wisdom told them that “any town” was not a good motel town or that they should steer clear of a particular town for some “wonderfully incorrect” reason.  I say have a look at all the details and facts about the locality and the business, then make your own mind up.

As a young man in a hurry 20 years ago, I was told by a very experienced and successful man I worked for and respected greatly, that when making decisions in business and life I should “listen to the advice given to you by your trusted people (Accountant, Solicitor, Financier, Parents, etc).  Take that advice on board, go with it, go against it, but be your own man and make your own decisions”.  That advice has stayed me, and I have continued to use that advice, and I suspect even used it subconsciously each day since.  This is relevant in that only the person making the decision to buy the business is the one who can truly make the right decision for their own reasons and in their best interests.

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.

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.

Value for Money

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers

Many times, over the years motel industry articles have focused on discussing issues that directly affect the owners and operators such as occupancy rates, sales revenue, and profit margins.  The one thing that has a major effect on each of these is the rates that can be charged for the product (and service) being supplied.

What are the factors that will determine the room rate that can be charged?  The bottom line answer is supply and demand for the product.  One operator alone cannot control supply and demand, but collectively the industry can manipulate it.  On an individual basis it comes down to how much of the demand can be achieved (market share).  Some can gain more and consequently as a result some will lose more, unless there is an increase in the level of demand.  In any town or city tonight there is a fixed number of overnight accommodation units available, no matter who is supplying it.  There is also a maximum level of demand, which can only be determined when the sun rises tomorrow.

To attempt to gain more of the demand and increase the occupancy rate, a motel can introduce various initiatives such as, discount their room rates, market the property to those expected to demand accommodation, increase direct advertising, work in conjunction with other accommodation providers, offer other incentives, etc, etc and the list goes on.  Underselling one’s product to get a quick sale is probably the easiest way to increase a quick, but short term market share.  However, the consequences will ripple throughout the business directly affecting the sales revenue and profit margin.

Current motel room rates throughout the state at present are at bargain prices for those consumers looking for a great deal.  Just as a shopper buys a new suit at half price and walks out of the store with a grin from ear to ear with the belief they “got a bargain”, those travellers requiring accommodation should really be doing the same thing at the moment.  After having stayed at various types of motels around Queensland recently there is great value available.  The high standard of motel and hotel units available at low overnight rates is something that really should be taken advantage of by anyone thinking of travelling.

Having stayed at many motels right around the state in recent months the value for money that customers are receiving is fantastic for them.  I have said to numerous people in recent times that the value for money staying at that rate was exceptional.  As a business, discounts are the last thing a motel operator wants to see, however room rates go up and down just like any other product or service and one has to try to make the best of the situation at that particular time.  Councils, Tourism Bureau’s, Chambers of Commerce, and other such entities in each region should be utilising this situation to the benefit of each region in trying to encourage more people to travel for work or leisure reasons, knowing that they will get a great deal and value for money on their accommodation stay.  Hopefully prompting them to take that business trip they were considering or that holiday or weekend away they were hoping to take.  Also, perhaps staying an additional night since they are getting such a good rate on their accommodation.  It needs to be sold to them though.  You can’t sell a secret and if the masses aren’t aware of the value for money available in accommodation then they are none the wiser.

Those additional nights of accommodation being achieved will mean increased occupancy rates and additional revenue for any motel or hotel that is able to take advantage.  The operator may still feel that the room rate is low however the compensating factor of increased occupancy is some consolation.  This will then lead to room rates being able to start to increase as a result of the stronger demand.  As the cycle starts to turn around (as it always does) and occupancy rates start increasing this obviously then leads to room rates increasing.  The “sandwich boards” start to disappear one by one and the room rates continue to grow overtime with demand.

Maintenance for a Rainy Day

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers

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.

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.

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.