Tips for Buying Motels

LIF T- OUT INFORMATION FE ATURE

TIPS FOR BUYING MOTELS How, what and why?

Andrew Morgan Queensland Tourism & Hospitality Brokers

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.

How to get started looking for a new business such as a motel is not always easy and gathering information can be done in many different ways…

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 port of call may be talking to friends or relatives who are in the industry or previously were. Alternatively, talking to people in and around or involved in the greater motel industry can be very helpful.

Speak to experts in the industry, 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 them personally before making any firm decisions.

Weighing up the facts and comparisons between the two will help determine what is suitable for each investor and what is going to satisfy the needs of each in buying a motel. Another of the main decisions 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 while the freehold property (land and buildings only) is retained.

Property specific motel matters to consider Number of units. How many units will suit the requirements?

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. I have seen extremely profitable motels with as little as eight units; however, I have also seen less than successful large motel complexes also. Each 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.

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. It can end up very labour intensive for the

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operator if it is not set up correctly with the right processes and suitable employees in place.

Standard/presentation.

Immaculate presentation or a renovator’s delight? 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. Room air conditioners that are not split systems are not well received by the market. It is well known that this will be an expensive upgrade that someone will need to pay for in the not too distant future.

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.

Location. The main positions motels tend to be include 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.

It makes sense that motels and other accommodation businesses be located in high traffic areas such as those mentioned in order to take advantage of the travelling market. Location does play a role in determining the value of a

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, however there can be substantially higher returns by buying a motel in an inland location.

Onsite residence. Motels more often than not offer an onsite residence. One must be aware that, although they are comfortable and large enough, they are not the size of a standalone 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 Online reviews. Read but be careful what one takes onboard.

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.

RESORT NEWS – DECEMBER 2017

LIF T- OUT INFORMATION FE ATURE ON TIP S FOR BUYING MOTEL S Lifestyle. Again the benefits of a family working together and the opportunities to grow with the business can be very rewarding for the whole family.

Every operator runs their motel differently and 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.

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.

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 percent against the value of a leasehold motel and 65 percent against the value of a freehold motel. Some higher some lower.

In general terms, these percentages offer a good base to start searching from.

The balance percentage plus purchasing costs will need to be made up of preferably cash; however, if not, then part thereof and part equity against another property or other form of security will suffice depending on the individual financial institution’s requirements.

Purchasing costs. These costs can be substantial but they 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.

Return on investment.

This depends on many of

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

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.

Cashflow. In most cases, and depending on the time of year, the first day of taking over a motel generally results in a good cashflow. 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).

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 timeframe in normal market conditions when marketed correctly.

Leasehold specific matters to consider Who is in charge. Many lessees 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.

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 percent to 45 percent of the entire net profit for the complex. There are other methods for determining motel

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rentals, such as a percentage of turnover. A dollar figure per unit site is often utilised as a check method.

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 three-year + three-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 ifs and buts in this situation.

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.

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

Finance. The cost to purchase a freehold motel is substantially higher than a lease, simply because the land and buildings are also being acquired.

Therefore, the cost to purchase and the ongoing costs will be far more substantial than the cost to purchase the business only. 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 at some point in the future.

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.

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 while receiving a high return on their investment.

When considering a motel as an investment or lifestyle opportunity it is best to decide what will suit one’s requirements and needs. 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.

RESORT NEWS – DECEMBER 2017

ICONIC FREEHOLD MOTEL COMPLEX

High quality iconic complex with 37 family, self contained, executive & studio units, restaurant & bar with commercial kitchen (not operating) and large 2 bedroom, 2 bathroom residence. Centrally located in a coastal regional centre with substantial highway frontage and 3 street access. The property has been immaculately maintained.

37 Units

4,084 sqm

Coastal North Qld

Ref: AFN85

Freehold $3,150,000

BEAUTIFULLY PRESENTED MODERN FREEHOLD MOTEL

High quality, modern motel situated in a strong motel region on a busy highway, currently operated under management with much upside for an owner operator. 22 large ground floor units, pool and bbq area, licensed restaurant and bar with commercial kitchen, spacious 3 bedroom residence. Great opportunity, well below replacement value. Owners will consider all genuine offers.

22 Units

2,414 sqm

Central Qld

Ref: AFB73

Freehold $1,000,000

RECENT SALES D SOL

D SOL

38 UNIT FREEHOLD INVESTMENT MOTEL

155 SITE FREEHOLD CARAVAN PARK

NORTH QUEENSLAND

FRASER COAST

ER UND ACT R T CON

ER UND ACT R T CON

ER UND ACT R T CON

ER UND ACT R T CON

BEACHFRONT RESORT COMPLEX

36 UNIT MOTEL

150 SITE CARAVAN PARK

195 SITE CARAVAN PARK

NORTH QUEENSLAND

CENTRAL QUEENSLAND

SOUTH QUEENSLAND

NORTH QUEENSLAND

Exclusive Agent: Andrew Morgan Queensland Tourism & Hospitality Brokers P

07 4953 1611 M 0417 608 041 W www.qthb.com.au

TROPICAL ISLAND HOLIDAY COMPLEX

An opportunity of a lifetime is now available and shows an excellent return on investment, multiple income streams and great lifestyle. Located 150m from beach, shops, bar and waterfront restaurants, the property has recently undergone a major refurbishment and presents extremely well.

12 S/C Units

1,012 sqm

North Qld

Ref: AFT82

Freehold $995,000

EXCELLENT FREEHOLD MOTEL OPPORTUNITY

20 ground floor family sized units with undercover parking, recently refurbished to an extremely high standard, prime main highway location in a large coastal town, very easy to operate low cost complex, huge 3 bedroom family sized residence with direct internal access to reception. Price reduced by motivated Sellers. Great buying.

20 Large Units

OLD

2,420 sqm

Coastal Central Qld

Ref: AFM83

Freehold $1,795,000

COASTAL FREEHOLD PASSIVE INVESTMENT MOTEL

S

Beautifully presented modern motel, quality licensed restaurant & bar with modern fitout, spacious 4 bedroom family residence with direct internal access to reception, resort pool and bbq area, centrally located in large coastal city, very long lease, quality lessee/operator in place, low rental comfortably affordable for the lessee, excellent 9.2% return. Best available on the market.

38 Units

4,048 sqm

North Qld

Ref: APC87

Exclusive Agent: Andrew Morgan Queensland Tourism & Hospitality Brokers P

07 4953 1611 M 0417 608 041 W www.qthb.com.au

SOLD