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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.

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.

Selling: Timing is Everything

Written by Andrew Morgan, Specialist Motel and Accommodation Broker

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

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

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

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

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

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.

Meeting the Market

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers


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

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

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

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

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

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

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