Tips for Buying Motels

TIPS FOR BUYING MOTELS

Motels:

a great business option Owning a motel has been a lucrative business option for a large number of people over the long term, as well as having been very rewarding and satisfying on a personal level for many moteliers.

Researching the motel industry is a good place to start the journey. In gathering information, the web is the place to start for any initial enquiries.

As with a search on any topic, sorting good information from bad requires further investigation and patience. Talk to friends or relatives who are, or have been in the industry and speak to experts, not those who “dabble a bit” and want to try to sell anything and everything. Speak to those who specialise in the motel industry.

When considering a purchase, the options available are many and varied. Where one wants to live is generally not the best place to start. Instead, looking at the regions that offer the best motel opportunities is a better option. Will those areas fit in with the family or lifestyle requirements one has?

Another consideration is which type of ownership tenure will suit you best. The main three types of ownership available for motel acquisitions are freehold, freehold passive investment and leasehold. Each offers different benefits and burdens to the owner and one must determine which would suit your particular situation best. Weighing up the facts and comparisons between them will help determine what is suitable for each investor.

Gaining some form of finance “pre-approval” is also helpful.

Remember however, that each lending situation is different so guidance on what you can and

for the operator to get to know and build relationships with their customers, which may well impact on whether they return or not. This side of the business can also be a problem area if not operated efficiently.

Andrew Morgan, Motel Broker, Qld Tourism & Hospitality Brokers

cannot purchase based on your financial capacity is invaluable.

Other factors, such as serviceability, will need to be dealt with on each individual business.

Another important decision that needs to be made early on, is whether one is going to operate the business yourself or not. This may affect the type of tenure that is considered.

Historically, (20 years ago) most motel owners were also the operators living on site, but this is not the case today with many operated on a more passive basis, either under management or under lease.

Motels are an excellent business in this respect as they can be operated successfully without the owner needing to be onsite all the time.

Physical considerations Number of units – Individuals should determine how many units they wish to operate and then work towards that.

The budget that is available will also affect this decision as the more units, generally the higher the price.

Restaurant/Dining – Love them or hate them, a restaurant or dining option requires operators to be more socially involved.

They provide an opportunity

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Standard/Presentation – The standard of the presentation of a motel will affect the return on investment expected by the market. If hundreds of thousands of dollars are required to rectify poor standards or years of neglect, it will affect the price that is paid for the property in its current state. Motels that are not presented in the best manner can offer excellent opportunities to add value to the business/property by rectifying areas in need of work.

Location – Motels tend to be focused near major highways, main roads, waterfronts and city centres as these areas tend to be places where demand for accommodation is at its highest. Location does play a role in determining the value of a motel as the demand for a coastal motel has historically been higher therefore pushing the value of the motel higher and the return on investment lower.

Residence – Motels usually offer an onsite residence. One must be aware however, that although they are comfortable and large enough, they are generally not the size of a stand-alone house.

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, rent, loan repayments, water, insurance, telephone, and much more.

Business considerations 1. Online reviews – Good online property reviews are invaluable. Be aware of them but be selective about what one takes on board. The main thing to consider is the tone of the reviews 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 how serious the problem is and how easily it can be rectified.

Sometimes issues can be easily fixed by a new operator, and therefore may be to the benefit of the buyer in the future.

2. Lifestyle – Again the benefits of a family working together, and the opportunities to grow with the business can be very rewarding. Getting into a position where you are confident enough to delegate certain areas of the business to key staff members will allow for more time to get out of the property and take time out for family, schooling or other social or sporting activities.

3. Potential/Opportunity to value add – The old saying is “no one buys a business unless they see potential”. There is generally potential in every motel business. Often investors fall into the trap thinking that where a motel operates on a very high occupancy rate, there may not be upside potential.

This sometimes offers the best potential, as the room rates could allow for an increase resulting in a lower occupancy rate, but a higher profit margin, and less wear and tear, etc.

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.

RESORT NEWS - DECEMBER 2018

TIPS FOR BUYING MOTELS media profiles, the business name, the plant and equipment, the right to the liquor licence being transferred, etc.

Consider which areas of the motel are underperforming and what new initiatives could 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, and is often an area where one can take do better than competitors who do not reinvest back into their motel.

4. Finance – Historically motels are known as solid and secure investments and therefore financial institutions (in the main) are eager to lend against them. They will generally lend 50 percent against the value of a leasehold motel and 65 percent against the value of a freehold motel. In general terms these percentages offer a good base to start searching.

The balance percentage plus purchasing costs will need to be made up of preferably cash, or part cash and part equity against another property depending on the financial institution’s requirements.

5. Purchasing costs – These costs can be substantial.

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 even the purchase of stock at value in order to continue to operate the business. Working capital will also be required, even though motels are strong cash flow businesses.

6. Return on investment – This depends on many factors including 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 also plays a major role.

Motels do offer very strong returns when compared to many other business opportunities.

Freehold considerations

7. Cashflow – In most cases, depending on the time of year, a motel generally provides a good cash flow from day one.

The type of clientele the motel has will have an impact on the cashflow but most guests pay by credit card or Eftpos. Guests on accounts are more limited to large companies only, most of whom use credit cards too.

8. Future resale – When it is time to sell there is generally a ready market for both leasehold and freehold motels. If priced and marketed correctly, most motels will sell within a reasonable time frame. If overpriced however, they will sit on the market until the price expectation meets the market’s assessment.

Leasehold Consideration 1. 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 designated premises without any disruption from the lessor, as long as they are not in breach of the lease.

2. Rent – The annual rental of a motel should never be more than the net operating profit after rent. A new lease should have a commencing rental of approximately 40 to 45 percent of the entire net profit for the complex.

There are other methods for determining motel rentals such as a percentage of turnover. A dollar figure per unit site is often utilised as a check method.

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3. Lease Time – 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. Even a lease that has been in place for 10 years and has 15 years remaining is deemed 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 factors in this situation.

4. Lease terms – Who is responsible for what? The terms of the lease and responsibilities of both lessee and lessor should be considered and advice sought from an experienced motel solicitor in regard 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. It pays to make sure one is happy with the lease document prior to entering into the agreement. As with anything, as long as both parties act reasonably regarding leases and their terms, then both parties benefit in the long run.

5. What am I buying? – The right to lease the land and buildings for a certain period of time on specific terms as well as the tangible and intangible assets of the business. This can include goodwill, such as the reputation the business has built up, the telephone numbers, email addresses, websites, social

1. Finance – The cost to purchase a freehold motel is substantially higher than a lease simply because the land and buildings are also being acquired. The interest repayments will be much higher so one must ensure that the business’ cashflow can cover the required loan repayments.

There are many benefits to owning and operating a freehold motel so many people purchase a lease motel in the first instance to build up funds and their experience, with the ultimate goal of acquiring a freehold motel.

2. Land area and spare land for expansion – Generally motels on a large parcel of land are sought after by the market.

Any with spare land offer the opportunity to expand and increase the number of units, income and profits as well as the value of the business and property. Being able to add value to a motel is a big incentive for those who wish to build up the value of their investment.

3. Passive investments – The ownership of the freehold and business of a motel can lead 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 researching motels as an investment or lifestyle opportunity, speak with experienced industry specialist professionals with a long association in the motel industry such as accountants, solicitors, specialist motel brokers and financiers. Once a suitable motel has been found always complete a financial and legal due diligence of the business and property to confirm all is in order.

RESORT NEWS - DECEMBER 2018

ABSOLUTE BEACHFRONT ACCOMMODATION COMPLEX

Well maintained 36 x 2 bedroom fully self contained units, pools, fire pit, tennis court, bbq areas and beach viewing platform.

Comfortable 2 bedroom fully renovated residence - freehold tenure. Idyllic ocean front location in a strong economic region. Easily operated by a husband and wife team with the assistance of cleaners. Consistently strong levels of units in the letting pool. A fantastic lifestyle business opportunity!

36 Units

21 Years Remaining on Agreements (approx.)

Beachfront North Qld

Ref: AMP102

MR $895,000

SAILS SPORTS BAR ON THE MACKAY MARINA

Set in an enviable absolute marina & ocean frontage location, is one of Mackay’s premier entertainment facilities. Outdoor dining & entertainment areas, steakhouse, seafood dining & takeaway, Sports Bar, TAB & 25 gaming machines. Long term lease in place with favourable terms. Excellent opportunity for new and enthusiastic operator to continue to increase trading substantially. Huge potential with great trading figures.

Ref: ALS25

Leasehold $2,900,000

RECENT FREEHOLD SALES D

D

D

SOL

SOL

RESORT

CARAVAN PARK

CARAVAN PARK

110 SITES

125 SITES

NORTH QLD

CENTRAL QLD

18 UNITS NORTH QLD

SOL

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SOL

MOTEL

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SOL

16 UNITS

CARAVAN PARK

COASTAL NTH QLD

FAR NTH QLD

104 SITES

ER UND ACT R T N CO

ER UND ACT R T N CO

MOTEL 37 UNITS

MOTEL 23 UNITS

COASTAL NTH QLD

COASTAL NTH QLD

Exclusive Agent: Andrew Morgan Queensland Tourism & Hospitality Brokers P

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

BEST LEASEHOLD MOTEL AVAILABLE

Immaculate 26 unit motel complex with function room (no restaurant). Excellent location close to the town centre with exposure to a large amount of traffic daily. Large family sized 4 bedroom residence, in-ground swimming pool and covered BBQ area with lovely landscaped gardens. Strong performing motel with increased trade year on year, low rental paid by the lessee. Offering a high return on investment – could be operated under management.

26 Units

22 Years Remaining (approx.)

North Qld

Ref: ALB103

Leasehold $1,450,000

COASTAL RETIREMENT VILLAGE

The rare opportunity to manage 38 Strata titled Independent Living Units is now available. The complex is located in a sought after suburb of a large coastal city, close to CBD, sports clubs, beach and airport. Facilities include pool, BBQ area and community room. Freehold component includes 3 bedroom, 2 bathroom managers residence and office/community centre. No industry experience or special skill required to operate the business. Outline is approx.

38 Strata titled ILU’s

Coastal North Qld

Ref: AMS100

Asking $1,950,000

FREEHOLD MOTEL WITH ESPLANADE FRONTAGE

Idyllic esplanade frontage location, only 50m to the ocean offering a fantastic lifestyle for a couple or family, very well presented 16 unit motel including fully self contained 1 and 2 bedroom units, beautifully refurbished 3 bedroom on-site residence, in-ground swimming pool and tropical gardens. Located in a strong regional location, close to shops, schools and sporting facilities. Outline is approx.

16 Units

3,793 sqm

Coastal Central Qld

Ref: AFO92

Freehold $1,580,000

Exclusive Agent: Andrew Morgan Queensland Tourism & Hospitality Brokers P

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