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Bedding has a Limit

Everyone you speak to has a horror story at some time in their life about a motel bed they slept on that was the worst bed they ever had to endure.  They had no sleep that night and will never forget it… and, will continue to bring it up when any conversation allows them to introduce it.  Sound familiar?  Allow me to paint a picture for you of an all too common scenario.

A motel guest parks their car outside their unit, they chose this motel because it looked like a good quality motel from the street or online.  They open the door after a long day on the road, ready for a good night sleep.  They comment that they are so tired they could sleep on the floor if they had to.  They look around the unit and like what they see, the room is very nicely appointed.  They look past the bed, then stop, and look back as something catches their eye.  “Does the bed look saggy....  It does...  It is!”.  To their horror, the bed is sagging in the middle and looks as though it was new back in 1999.  Albeit very disappointed with the look of the bed after the long drive, they don’t say anything to management, and proceed to toss and turn all night, resulting in the worst night’s sleep they have ever had.  The next day they leave the motel vowing never to return because of the bedding and armed with a story for the ages

Over the last 23 years of motel brokerage and in excess of one thousand motel inspections, I still cringe when I walk into a motel unit to see a beautiful room spoilt by a bed that should have been upgraded five years ago.  One of the first things a potential buyer of a motel does when they enter a room is to lift the bedspread, sit on the bed and check the bedding quality.  If the bed is sagging and well past its use by date, immediately the potential buyer becomes concerned about what else in the property needs replacing.  One of the first things asked is, “when were the beds last replaced?”

As anyone in the motel industry knows one of the fundamental items of a motel unit is a good quality bed.   Without this, you may as well throw away the HD or 4K LCD television, quiet split system air conditioner, free WiFi and all the other goodies, because that bed has now done more damage than any of these items put together can make up for.  When that guest tells one of his friends not to stay at that motel because they will not get a good night sleep, the cost to replace that bed now seems like a drop in the ocean compared to the potential business lost by bad word of mouth.

In my opinion beds can be easily replaced at a minimal cost and can be done regularly, rather than when the sag in the centre appears.  To a guest a bed is the be all and end all.  It is the difference between a guest giving the best free advertising for a motel to everyone they speak to.  It can also be the worst adverting when they review the motel online or in person when the bed is not up to scratch.  To a potential buyer of a motel business it is also the be all and end all, even though they are easily replaced.  Human nature then makes a buyer wonder what else is not up to scratch if one of the most important items, such as the beds, are in poor condition.

The difference between a good quality bed and one ready for the scrap heap cannot be overstated, and no one can be fooled by a poor bed dressed up to look five star.  Regular replacement of bedding can not only ensure happy guests, but come sale time can indirectly help to play a big role in achieving a successful sale.

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

Enjoy the View

Everyone would love to live by the mantra, “work smarter, not harder”, but this is extremely difficult to do.  Rolling the sleeves up and getting the job done is the Australian way.

It is just so easy to think “by the time I explain it to someone, I will have the job done myself”.  The trap here is that we end up working harder, and running ourselves into the ground.  This is very easy to do in any profession, especially in the motel industry.  When living on site at the business and trying to operate that business as efficiently as possible, the result can easily be running oneself into the ground.

The most important role in operating a motel is the role of the owner/manager.  It is therefore important to avoid falling into the old trap of only working in the business and not on the business.  Working in the business takes care of the day to day jobs, but it does not grow the business.  It is the owner/manager who will take the business to a higher level by attracting new customers and growing the client base, making the operation more efficient, improving the online presence, etc, etc.  If the owner/manager is not working on these things and just the day to day jobs then it is really a caretaker’s role as opposed to being a management position.  Working on the daily items will cut wage costs but this is a very short term view.

This is all very easy to say, however putting it into practice is another matter.  Delegating certain roles to free up time to either work on the business or take some time out is extremely important.  Burn out is a common reason for selling, before one has been able to achieve what they set out to with the business.  In many cases this ends up in the sale of a motel (or any business) at a lower value than could have been achieved had the owner not been tired and therefore more eager to sell than necessary.  A typical example is when a new owner takes over, spends a large sum on capital improvements or refurbishments and sells out short of their planned time frame prior to realising the full benefits of their investment.

Effectively managing the roles within a motel are important whether it be management, reception, accounts, cleaning, meal preparation, etc.  If one is attempting to fulfil all these roles to some extent, there is going to be a point where it cannot continue due to fatigue.  If an operator can free up some of their time by allowing staff to handle certain roles, this will assist in freeing up time for the operator to work on improving the business or alternatively taking time out to recharge the batteries.  This is another important area to consider.  Taking time out can often refresh the mind and assist in working on the business also.  New ideas and improvements that can be made to the operation will often come more easily when one is relaxed and has taken some time out from the pattern of the day to day jobs.

Enjoying operating the building the business will no doubt make for a more relaxed environment for all concerned including family and employees.  An excessive work week cannot be sustained for any length of time, and this is where working smarter rather than harder by delegating some of those jobs to staff, even just for a few hours a day, will make for a much more enjoyable motel operation.  It may cost a little more in staffing extra hours, but in the long term view it may be a cost that is recouped in many ways, tangible and non-tangible.

Written by Andrew Morgan, Specialist Motel & Accommodation Broker
Photo Credit Tourism & Events Queensland

Annual Motel Market Wrap Up 2018

Written by Andrew Morgan, Specialist Resort & Motel Broker

What a difference a year can make. In the 2017 wrap up I commented that 2017 was similar in many aspects to 2016. This time I am happy to say that 2018 could not have been more different to its predecessor.

In summary, 2018 has shot the lights out compared to 2017. Sales volumes are up significantly and 2019 is looking strong going forward. Sale values are improving along with occupancy rates and slowly but surely, room rates throughout the state.

The first quarter started out strongly with activity that had been building late in 2017 and the rest of the year continued to follow. The second quarter showed a very strong period of sales and enquiry. The third quarter activity continued with impressive sales numbers that confirmed an appetite for good quality accommodation businesses. The final quarter of 2018 has seen enquiry levels drop slightly however genuine buyers are still active with many accommodation businesses across Queensland under contract. Again, as was the case last year, freehold sales have dominated the transactions settled.

Solid gains in economic prosperity for areas of the state that had been down have been welcomed. Increasing occupancy rates have resulted and room rates are now under pressure to increase. The redevelopment of sites (and pending future redevelopment) predominantly improved with older neglected properties where the highest and best use of the site was no longer the existing motel property has been occurring. There are no doubt more to follow where the lack of capital injection for maintenance on some of these properties will result in redevelopment of the sites.

The tourism sector has again continued to grow with Far North Queensland showing good signs of improvement. Last month’s issue of Resort News spotlighted the North Queensland region which showcased some very positive commentary on how the region’s accommodation sector has been faring. The Australian Dollar has been holding around the 70 – 72 cent mark which at the same time last year it was noted that it was “maintaining that mid 70’s percentage mark”.

The contraction of the resources sector seems to be largely behind the state. Companies have been reporting strong growth and demand for labour has seen regional towns that were struggling now having a spring in their step. A clear example of this is Mackay, where the residential rental vacancy rate reached 10.5% in 2015/16. It is now down to 1.7% which is as low as it has been for the last 10 years. Again it confirms that everything is cyclical. What goes down will go up!

Leasehold motel transactions have been subdued witnessing the lowest amount of sales activity. There is however 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 in the level of demand for motel leases in the last couple of months.

Investors have continued to seek the comfort that freehold motels offer with freehold sales being recorded at all stages throughout the year. Any good quality freehold properties with up to date trading data, priced correctly, and presenting well are selling.

An interesting point to note is that often in times of fluctuating markets buyer demand and confidence can be hit and miss. In contrast to 2016 and to a lesser extent 2017, this year has seen most properties that have gone to Contract have reached settlement. Pressure on those buyers from under bidders has ensured that special conditions were met on time, or that Contracts were entered into on an “unconditional” basis. Cold feet has not been an option. Again, this has been another very positive sign of the market continuing to strengthen.

2019 looks to be very positive moving forward for the Queensland accommodation sector.

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.

Leasing over the Long Term

Written by Andrew Morgan, Specialist Resort & Motel Broker

All markets fluctuate.  None stay at the top forever and none at the bottom.  Motel leases are no different.  Having been very popular for such a long time it was inevitable that they would not stay that way forever.  With freehold tenure seeing most of the interest in the market in more recent times for various reasons, leases took a back seat for a while.  Again though, all markets fluctuate and interest in leases is starting to come back around.

Leasehold motel ownership has been a success story across four decades now.  It grew very quickly throughout the early to mid-nineties and has remained an attractive option for motel ownership for very good reasons.  The many benefits of owning a motel lease are why many moteliers continue to expand their motel investment portfolios.

Changes within the motel leasing industry in recent years has had some positive influences as a result.  This has largely been on the back of changing market perceptions and the industry adapting to “accommodate” these changes.

Over an extended period, the benefits of owning a leasehold motel business have held up.  Leasehold motel businesses satisfy the main buying motives of any business investor - financial, lifestyle and security.

Financial Benefits
High ROI – The return on investment (ROI) for motel leases is strong and in the main range upwards from 28% (most are within 30% - 35%) depending on certain factors such as location, length of the lease, level of rent, economic strength of the region, property presentation, strength of business, etc.
Low Capital Outlay – A motel lease does not require one to buy the land and buildings of the motel.  This is the larger value component of a motel and buying the property therefore increases the capital outlay considerably and reduces risk, and therefore return.
Financing – The lower capital outlay means the loan required will be substantially lower.  Lower loan repayments and fewer sleepless nights for those not wanting to borrow to buy freehold.  Banks are historically very comfortable lending for motel acquisitions as they are solid and secure businesses.
Taxation Benefits – This is dependent on numerous factors such as how the ownership structure is setup.  The benefits of living out of the business include but are not limited to, whatever costs one incurs living in their stand-alone home such as insurance, electricity, rates, food, beverages, telephone/internet, rent/loan repayments, motor vehicle costs, etc.
Quality Presentation – If a budget to buy a motel is one million dollars, the opportunity exists to buy a much larger and higher quality motel property under lease, than a freehold motel at the same budget.
Long Lease Tenures – On most occasions’ leases commence as a 30-year term inclusive of option periods.  This is a very long lease tenure offering the lessee long term security to operate the business.
Strong Cash Flow – Upon commencing operating a motel there is an income from day one depending on the level of occupancy.  An operator will achieve a certain level of cash flow immediately as most guests pay by credit card.
Limited Stock on Hand – Motels carry very low amounts of stock.  Motels with restaurants will carry more stock than those without depending on the size of the food and beverage operation.
Ready Market – When the time comes to sell there is a competitive market to acquire motel leases.

Lifestyle/Personal Benefits
Easily Operated Under Management – Motels are comfortably managed by a couple, so if an owner decides they would like to step back from the business for a while, there are many good management couples available who can manage a motel.
Onsite Residence – Offers a home to live on site for the family allowing more family time together whilst operating a business.  Children can also get involved and start experiencing the industry at a young age.
Downtime During the Day – Motels are generally busy until late morning and again from late afternoon.  The time during the middle of the day offers some downtime for the operator.
Building Customer Relationships – For those who enjoy building customer relationships, motels can offer a lot of repeat clientele if the guest is looked after.  There is a lot of personal satisfaction gained when a customer keeps coming back regularly because they are happy with the service being provided.

Security Benefits
Long Term Leases – Often leases commence at 30 years in total split up with option periods.  The ability to extend leases as the term of the leases diminishes is often available.
Lease Terms – Leases are predominantly set up on mutually beneficial commercial terms to the Lessee and Lessor and therefore work very well.  The clearer these terms are, the better for both parties.
Asset Ownership – Includes the title to all the plant and equipment in the motel and the remaining tangible and intangible assets such as business names, contacts and goodwill.

The End Result

Written by Andrew Morgan, Specialist Resort & Motel Broker

Every now and again I hear the comment that “the Income is not high enough” when a prospective investor is looking at a business.  When I say Income, some call it Turnover, some call it Sales Revenue, and the list goes on.  The only reason I can conclude in regard to the objection, is that the potential buyer looking to buy the business is planning on operating it at a lower profit margin or higher cost base.  Usually new operators look to reduce overheads and improve profit margins to increase the Net Profit and therefore the value of the business.  The value of any business is largely determined by two factors, the return on investment, capitalisation rate, or yield and the Net Profit of the business, against this yield.
Depending on the structure of the business, how it produces its income, how it operates and the resultant profit margin it achieves, will determine what income the business makes and what profit it can achieve.  A business producing a high profit margin will have low overheads and therefore a high profit in relation to sales income.  Vice versa for a low profit margin with high operating costs to produce its income.  Every business will produce a different profit margin.

The Net Operating Profit of any type of business is the determining factor for assessing the business’ value.  No valuer determines a business valuation on the basis of what Sales Income is produced.  Yes, it plays its role in the process, however capitalising an income figure as opposed to a Net Profit is not done.

The value of cashflow to a business, relates directly to the day to day operation of the business, not the on-going Net Operating Profit over the period of say a year.  It stands to reason though that a motel with a higher Sales Revenue that also has higher Operating Expenses, may therefore have the same cashflow problems that a motel with lower sales and lower expenses has.

A simple comparison to consider.
 
Motel A 
  25 units & Restaurant  
Motel B
  25 units & Restaurant  
Annual Sales Revenue   $1,000,000  $750,000
 Annual Net Operating Profit  $400,000  $400,000
 Net Profit Margin  40%  53%
 Return on Investment  14%  14%
 Freehold Value in the Market  $2,850,000  $2,850,000

Now with both these motels being valued at the same price in the market due to their returns on investment being the same, why would a lower Sales Revenue make Motel B worth less than Motel A?  These motels have very different Sales Revenues, however their Net Operating Profit is the same.  The reasons for this are numerous, however a few explanations may be that one is operated more efficiently than the other, or because one has a source of revenue that is not as profitable as others, or because the particular location attracts higher operating costs, etc.  A big one is often the underselling of a unit.  A 90% occupancy rate on a tariff 20% less than what is achievable will do it!  In other words, discounting!  The easiest way to create a higher cost base and operate less efficiently.


Either way, the business with the lower Sales Revenue is not worth less than the one with the higher Sales Revenue? I would assume that the business with the lower Sales Revenue and Higher Profitability could end up being more attractive to the market than the Motel with the higher Sales Revenue.  This would be due to it being potentially less labour intensive or having a lower level of risk than the other, by being able to operate at a lower cost base.

As mentioned, a Registered Valuer who is doing a Valuation on a Motel Property or Business will base their valuation on a Capitalisation Rate of the Net Operating Profit of the business, not the Sales Revenue.  Therefore in the above example, with all else being equal, Motel A and Motel B will be valued at approximately the same level, even though they have substantially different Sales Revenues.

Financial Presentation

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

We talk a lot about making sure a motel’s presentation is up to standard before taking a business or property to the market for sale.  The first thing we think of when talking about presentation is the physical aspect and look of the property.  But what about the financial presentation of the business?

Supporting financial data to confirm what the Seller is saying about the business and how it performs is just as important as the physical standard of the property.  An issue with either will turn a buyer’s focus away from wanting to pursue the business and onto others that are looking more attractive.  How financial data presents can be covered a couple of different ways.

1. So how do the numbers actually present?  Not how high the income or profits are , but how they are presented on hard or soft copy.  Do the totals add up?  Don’t laugh, I have seen many addition errors over the years.  The total expense amount is less than what the individual expenses total.  Are the Seller’s Accountant’s supporting documents also attached to the profit and loss statements?  Is the spelling of each entry correct?  Again, don’t laugh, this is common.  I have the same issue with spelling mistakes on a profit and loss statement as I do with an email.  If I see an email come in and there are spelling mistakes in the subject line on text, I immediately think the email is spam and discredit it.  The same goes for financial statements.  I start to wonder who prepared this profit and loss statement, surely it was not the Seller’s Accountant.  Again, I start to question the validity of the statements.

2. Next comes the all important amounts.  The Income & Net Profit must be as high as they can to achieve the full sale value in the market.  Therefore I suggest every Seller has their Accountant prepare an Abridged Profit and Loss Statement.  This will present the profit of the business as it should for sale purposes.  It will have removed all Income and Expense items that are particular to the current owner and not the business.  As an example an owner choosing to pay themselves a wage of $50,000 per annum as compared to $5,000 per annum, has nothing to do with the business, this is generally a taxation based decision.  Profit and Loss Statements are generally prepared for Taxation Return purposes and to that end include expenses and tax deductions which inevitably present the lowest profit possible, or even a loss depending on each parties individual tax position.  Adjustments will then be completed so the Abridged Profit and Loss Statement can be used for sale, refinancing or other purposes.  If not, a true representation of the profitability of the motel business compared to other motel businesses would not be possible.  Conversely it is also important to make sure that no legitimate operational income and expenses of the business have been removed.  Even the most basic due diligence of the financial statements will determine this.  The best result from this is that the end sale price of the business will be affected negatively if the profit has been overstated.  The worst is that the transaction will be terminated altogether.

Aside from the Profit and Loss Statements being required by a potential buyer, other financial data such as monthly income and occupancy figures will be required for cash flow purposes.  Council rate notices, electricity, laundry, rent (in the case of leases) and Insurance Invoices and Receipts (to name a few) will be required.  These must all match what has been included in the Profit and Loss Statements.  Providing monthly Income Statistic reports that include GST, will not match the Profit and Loss Statement.  As long as the consistency of the difference of the GST is there, the issue can be cleared up quickly however if this is not the case, the interested buyer starts to question the accuracy and legitimacy of the data.  If there are anomalies for a particular reason, be upfront and explain why this is the case.  Never try to sweep it under the carpet and hope that the issue goes away.  That never happens!  Make sure all the data you as a Seller are providing matches up.

Buyers who are interested in buying a business want the financial data presented to them to be accurate.  When their interested is sparked in a business it is based on the information that has been provided.  If any anomalies arise they are probably more disappointed than anyone.  Nine times out of ten the financial data presented will be accurate.  There may be small differentials here or there but in the main these will not have a material affect on the profitability or value of the business and are easily explained or remedied.

No one buys the smallest of products if they are unsure of its validity and correctness, let alone a business and property.  The credibility of the financial data being presented and the person presenting that data is paramount.  Lose that credibility and lose the sale.

Tenanted Motel Investments

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

The high return and low risk offered by motels as a tenanted investment was targeted by many savvy investors over  twenty-five years ago.  In its infancy in the early 1990’s, some leases were put into place that were not suitable for both parties involved.  These teething issues were largely ironed out by the mid 90’s.  Since then demand for motel investments has been strong ever since.  Today we find they are rarely available on the market and are a tightly held commodity.  With the high volume of motels that operate under a lease today, it is surprising just how few tenanted investment motels are ever on the open market for sale at any one time.  When they do come onto the market they do not remain available for long, generally selling quite quickly.

In the early stages of leases being put in place over motels it was largely only former or existing motel owners/operators who were interested in investing in motels as passive investments.  They knew the industry well, they understood how a motel was operated and they knew travellers always require accommodation, no matter what the reason for their travel was, business, work, pleasure, etc.  The wider investor market had not considered investing in motels, and not having any history or dealings within the motel industry, were not that interested.

However, overtime as the high return and low risk benefits of motels were more recognised, interest started building in the motel industry as a tenanted investment opportunity from other investor markets.  Investors who had previously focused on Residential, Commercial or Industrial Properties, were now looking at the benefits a motel investment offered.  Corporate investors as opposed to the traditional “Mum and Dad” investor entered the industry in a big way.  Many of these larger entities own numerous motel properties and even the smaller individual investors have continued to add more motels to their investment portfolios.  Self-Managed Superfunds have become a popular investment vehicle for investors to purchase their own motel, with a secure long term lease in place.

Bank interest rates over recent years have assisted to increase the demand for passive investment motels where cash in the bank at its current interest rate levels is not an attractive investment option.

Benefits that have attracted the interest of the investor market to motels as tenanted investment options are:-

  • High Investment Returns – Investors have achieved excellent returns on passive investment motels over the years.  Market net returns on passive investment motels are currently at approximately 9%+ on capital invested.  The return to an investor compared with other investment options such as cash or residential property make them very attractive to a number of investor types.
  • Low Risk – Motels have proven themselves over the years to be very low risk investments.  Solid and consistent businesses in general operating from an investors building is what anyone is looking for.  Good locations in busy positions often means the investment is underpinned by a strong land component.
  • Fully Tenanted – One way or another, a motel property that is leased almost always has a lessee, as opposed to other investment options.  If a lessee/operator was to close the doors of the business the mortgagee would almost always appoint an operator to reopen until the business was on sold.  The alternative is that the property owner operates the business themselves or under management until the business is on sold.
  • Freehold Tenure/Increasing Land Values – Freehold tenure and the ownership of a tangible product, being a commercial property.  Motels are generally located on busy main roads or other desirable locations which are larger blocks of freehold land that increase in value over the longer term.
  • Solid Building Structure – Motels are typically of brick/block construction and this type of structure requires minimal ongoing works.  Any move away from this type of structure to more cost saving types of building materials/construction means an adjustment in the maintenance requirement to be budgeted for over time.
  • Outgoings – Generally within motel leases the Lessee pays all outgoings.  Outgoings paid by the Lessee include, but are not limited to Property Rates, Insurances, Repairs and Maintenance, and Electricity.  Leases were originally set up this way so that the Lessee had control of his/her own business and did not have to go to the property owner every time they needed a light bulb changed.  The Lessor may be responsible for a few items such as Land Tax (unless included as an outgoing) and Structural Repairs/Replacements.
  • Building Allowance/Tax Benefits – Relatively young buildings or those that have undergone major refurbishments (capital works) will have some level of building depreciation or write off allowable.  This will vary for each property however the tax benefits in many cases can provide good taxation relief to the property owner.

Know the Cost

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

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

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

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

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

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

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

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

Property Features

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

Dining In or Out?

Written by Andrew Morgan, Specialist Motel & Accommodation Broker

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

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

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

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

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

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