Motels Made Easy

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Motels Made Easy.

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RESORTBROKERS.COM.AU

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MOTELS Motels are the backbone of our accommodation sector.

Since these roadside retreats emerged in Australia in the 1950s, they’ve evolved and endured to remain vital, lucrative business and property investments.

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THE OUTLOOK FOR AUSTRALIA’S ACCOMMODATION SECTOR IS STRONG ON THE BACK OF TOURISM INDUSTRY GROWTH.

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This informative guide is designed to provide anyone considering an investment in a motel with a sound overview of the industry.

We help you understand what motels are, the investment and operational options available, and what motels can offer you.

You’ll also find helpful tips on what to look out for as you explore opportunities in this thriving industry.

WHAT ARE MOTELS? Of course you know what a motel is … a place to lay your head, accommodation for travellers seeking comfort, convenience, good value and great service. But what do you actually know about the business behind the ‘vacancy’ sign?

And so they did here. With similarly vast distances to travel and motorcars increasingly available to the general populace, Australia embraced the ‘motel experience’ in the mid-1950s. And we’ve never looked back.

As it does for many things, Australia’s motel heritage owes its origins to the USA. There, in the early 20th century, the rise of the automobile saw Americans take to the road. No longer confined to the railway, tourists could choose their own routes, destinations and timetables.

The concept endures. Comfort, convenience and value – these are the fundamentals of the motel industry. That’s why, all these decades on, they’re every bit as important to travellers and the wider tourism industry.

Motels remain in high demand from investors and operators because they continue to offer excellent returns.

Accommodation choices, usually hotels beside railway tracks, didn’t suit the new mobile population. Convenient and functional lodgings for motorists were needed. What evolved – tourist cabins, ‘motor courts’ and eventually motels – became part of popular culture.

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HOW ARE MOTELS SOLD? Motels are usually offered for sale in one of three ways – as a freehold going concern to an owner-operator, as a leasehold motel business, and as a passive commercial property investment.

FREEHOLD LAND & BUILDINGS

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COMMERCIAL BUSINESS

SOAP FREEHOLD GOING CONCERN

This is perhaps best described as the ‘traditional’ model of a motel – where one party is both the owner of the freehold land and buildings and the operator of the motel business.

Prior to 1985, all motels operated this way. Now, fewer than 20% of Australia’s motels are Freehold Going Concerns.

The owner-operator is responsible for all aspects of the motel, from property maintenance and room refurbishment to generating bookings and taking care of guests. No rent is payable, so the owner receives all profit after operating costs are covered.

There are advantages to owning and controlling the accommodation business and the freehold land and buildings. As an owner-operator, your motel is both an income-generating enterprise and a substantial commercial property asset.

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SOAP

It is a home and a business, providing security of employment and investment. You enjoy the best of both worlds. Each component – the accommodation and hospitality business and the commercial property holding –presents opportunities for growth.

The land and buildings form a key commercial real estate asset that, independent of the business, may rise in value. The owner-operator is able to capitalise on the value of the property through improvements.

All the time and money you invest in the property, on upkeep and improvements, enhance its value.

The value also relates to how well the business is run. So, in this respect, the owner-operator is in control of their own destiny. Rather SOAP than relying on a lessee to protect your value by good business management, you are able to market and build the business for maximum profit and growth.

SOAP Owner-operators also have flexibility. If you no longer want to run the business, you can retain the freehold land and buildings while creating and selling a long-term, income-earning lease. For some, buying a motel as a freehold going concern, building the business and then onselling the lease at a higher value is a worthwhile growth strategy.

YOU CAN BENEFIT FROM AN INCREASE IN THE COMMERCIAL PROPERTY VALUE AND THE BUSINESS

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COMMERCIAL BUSINESS

LEASEHOLD

In this case, you buy a long-term lease to occupy the land and buildings of the motel and operate the business. Motel leases offer you the opportunity to buy a motel business for a much lower financial outlay than is required for freehold purchase. The business is yours to market, manage and build for maximum profit and growth.

The lease value is made up of three components – the purchase of the business (the lease term), the chattels (generally all portable furniture, décor and gear needed to run the business), and goodwill (the value attached to intangible assets like the motel’s reputation, regular client list, etc).

Leases are sold on the return (net profit of the business after add backs, capitalised at an agreed rate). The return percentage depends on factors including the location and condition of the property. The industry standard for most new park leases is a term of 30 years.

This is made up of a fixed term plus options (e.g. 10 years + 4 x 5-year options).

Lessees, who pay their landlord an annual rental for usage of the land and buildings, often live on site and undertake the day-to-day management of the motel. You are free to run the property as you see fit, as long as you pay the agreed rent and maintain the property in line with the lease agreement.

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The lessee’s objective is to grow occupancy and tariffs, thus increasing the net profit and, ultimately, the value of the business. You are responsible for paying all operating costs, such as wages, rates and outgoings, and for the maintenance and replacement of all chattels necessary to sustain the goodwill of the business.

You are also responsible for day-to-day repairs and upkeep, including painting and signage. The landlord is responsible for structural repairs and replacement of fixed items and equipment such as toilet and shower systems, built-ins, hot water cylinders, and any other structural items.

N.B. No two leases are the same. The specifics outlined above depend on the lease agreement.

LEASEHOLDS ARE VERY LUCRATIVE. IT ALLOWS AN OPERATOR TO ENJOY A STRONG CASH FLOW COMBINED WITH THE BENEFIT OF A HOME AND A BUSINESS ALL IN ONE.

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FREEHOLD LAND & BUILDINGS

FREEHOLD PASSIVE INVESTMENT

The success of the leasehold motel model has made valuable freehold motel properties available to passive commercial property investors.

The owner of the ‘passive investment’ is also known as the ‘landlord’.

The landlord owns the land and buildings on, and in which, the motel operates, but they have nothing to do with the operation of the motel business. The landlord receives an annual rental income from the lessee. Depending on the terms of the lease agreement, this rental figure generally increases annually in line with CPI. Some leases include a rental review clause.* While general repairs and maintenance, rates and insurances are the responsibility of the motel operator, the landlord is responsible for all structural repairs and is expected to maintain the standard of the property for the duration of the lease.

Motel properties are widely regarded as secure and lucrative passive investment opportunities because they are usually located in prime highway, coastal or CBD locations, and have secure, long-term leases offering attractive returns.

Compare this with a commercial or industrial building where, if your tenant defaults, all you can do is put a “For Lease” sign on the building until you can find another tenant. In the case of motel investments, as there is an inherent value in a motel lease, you have a tenant who has paid a significant amount of money and is keen to be there. And your motel tenant will do a much better job of maintaining your building because it is their home and their livelihood.

N.B. Practices can vary slighting in different states across Australia.

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THE KEY TO SUCCESS IS SERVICE. GOOD SERVICE IS REWARDED WITH GOOD RETURNS.

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$7.9 BILLION TOTAL REVENUE GENERATED BY HOTELS & RESORTS: BANKWEST FUTURE OF BUSINESS REPORT

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HOW MUCH CAN I SPEND? So, the prospect of buying a motel sounds good? What next?

The starting point for every prospective motel buyer should be to work out exactly what you can afford to spend, and your borrowing capacity.

The easiest way is to speak with an industry expert – either a specialist broker (that’s us!) or experienced finance professional / bank.

Consider the value of your assets. As well as cash reserves, they might include the family home, shares, superannuation and other investments. Depending on your financial position and your ability to service debt, you might consider selling some of these assets to finance your motel purchase.

As financial institutions look rather favourably on the motel industry because of the security of investment it provides, lending ratios are relatively generous.

Banks will usually lend at least 50% of the total cost of a leasehold motel. For example, if you were to purchase a lease for $1,000,000, you would need to provide $500,000 and the bank would provide $500,000.

For freehold (passive) investments, banks may lend up to 60% of the purchase price. So, if you buy an investment for $1,000,000, you will need to have $400,000 available.

In the case of freehold going concerns, because the bank will have the security of the land, buildings and business, they are prepared to lend up to 60-65% of the purchase price. This means, if you were to buy a freehold going concern motel for $1,000,000, you would be required to contribute $350,000 - $400,000 and the bank would tip in the balance $600,000 - $650,000.

NB. The above is a guide only and bank lending depends on your current financial situation.

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BANKS LOOK FAVOURABLY ON THE MOTEL INDUSTRY BECAUSE OF THE INVESTMENT SECURITY IT PROVIDES One of the most critical areas to look at is loan serviceability. Banks usually want to ensure you can pay off your loan over 10 years, even if the term of the loan is longer. And although they may be satisfied you have ample security, they’ll also want to ensure you can generate sufficient income to repay the loan and live comfortably.

A great advantage of motel investment is that the property can be both home and business, which means you can enjoy considerable saving on your cost of living. If you live on site, utilities and many other costs are put through the park as business expenses.

+ COSTS OF PURCHASE You will also need to budget for the anticipated costs of purchase – to cover such things as loan establishment fees, legal costs, income verification and stamp duty. As a rule of thumb, we advise you to allow an extra 5 – 10% of the motel’s price, on top of your portion of the purchase price.

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WHAT IS THE PROCESS FOR BUYING MOTELS? The process involved when buying a motel is well established and ensures a maximum degree of security over your purchase.

HEADS OF AGREEMENT

When you have inspected and found your perfect property, we ask you to make an offer via a ‘Heads of Agreement’ form. This is a nonlegally-binding document that serves to formalise your offer. The form is presented to the seller, who may accept, reject or counter-offer. The process is repeated until a price is agreed (or not, as the case may be).

CONTRACTS

Once a price is agreed, the vendor’s solicitor will issue contracts. Both parties sign on the dotted line and the property is now ‘under contract’. It usually takes a couple of weeks to be prepared and agreed by both parties.

DUE DILIGENCE

Now begins your process of undertaking due diligence – a comprehensive appraisal to verify the motel’s assets and liabilities and evaluate its commercial potential.

FINANCIAL SCRUTINY

This is the first step in the due diligence process. Your appointed accountant will review the property and financial information provided by the vendor. This is to ensure the income isn’t being overstated.

Your accountant will provide a report detailing his or her findings. If discrepancies are found, a price adjustment may be warranted.

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LEGAL

The next step is for your appointed solicitor to verify the business is legally sound. This includes examining the lease document and conducting searches.

VALUATION

Some banks will require an independent valuation, carried out by a properly qualified licensed valuer, of course.

FINANCE

The final step is for your chosen financier to provide a stamp of approval for your loan. Once this has been granted, the contracts become unconditional.

LANDLORD CONSENT

Landlord consent to assign the lease is an important piece of the puzzle and, for this, you may need to produce a asset and liability statement and personal and work references. Your bank will also require an entry deed to be approved by the landlord before settlement.

SETTLEMENT

Settlement of your purchase can happen within a week or two of finance being approved. Often the settlement date is pre-agreed between vendor and purchaser.

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WHO CAN HELP ME WITH BUYING A MOTEL? A motel is a unique and potentially complex type of business / property. We cannot stress enough how important it is to seek the professional advice of specialists who have direct knowledge and experience of the motel sector.

Aside from your agent, who will be your vital linchpin through every step, there are some key people whose help will ensure you buy the right motel and that the process unfolds as smoothly as possible.

They may not be your regular family advisors. But it is vital they are professionals who understand the finer points of the accommodation industry. The security and reassurance gained by dealing with proven experts is invaluable.

FINANCE

If you are dealing directly with a bank, make sure the representative looking after your business is someone who specialises in motels.

Ask how many motel transactions they have handled previously. And remember, it is wise to obtain a few finance quotes to compare.

We highly recommend you consult a specialist finance broker. Using a broker won’t cost you extra. And, because lenders expect brokers to shop around for the best deal, they will usually make an effort to ‘sharpen their pencils’. A good broker will also know which lenders are most suited to the type of motel you want to buy.

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ACCOUNTANT

Leasehold and freehold going concern buyers will need an accountant to ‘check the books’, ie. to verify the Profit & Loss Statement. Again, it is critical you engage a specialist accountant who has an intimate knowledge of the industry.

This is a big investment for you. The value of the motel is derived from the profit it makes. So you must be 100% confident the business is making the money it claims, and that the income is sustainable. Your lender will require this security as well.

A specialist accountant will have verified hundreds of motel P&Ls during their career. They know what to look for, and what rings alarm bells. They understand where operating costs and wages should be, in line with industry averages. And they can provide sound advice in the event of any discrepancies.

Before going to contract, you should also ask your accountant about establishing the appropriate entities to suit your needs. The structure you set up to buy the motel can have significant tax implications, and an industry expert knows how to maximise benefits.

YOU MUST BE CONFIDENT THE STATED INCOME IS ACCURATE AND SUSTAINABLE

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SOLICITOR

Buying a motel, especially a leasehold motel, is very different to other commercial real estate transactions. Only a specialist lawyer will truly understand the complexities. You need an expert legal eye overseeing the process, watching your back, helping you to understand any and all issues that might arise.

As mentioned earlier in this guide, it is your lawyer’s job to scrutinise and ensure the validity of agreements that provide the security to the business you are purchasing.

BROKER

Your agent will play the most integral role in helping you find the right motel. Make sure the broker you deal with is suitably experienced. Find out how long they have been in business, how many motel sales they have successfully negotiated and, where possible, speak to previous clients.

An experienced motel broker will understand details a general real estate agent or business broker may not – the structure and implications of the lease agreement, its term, the duties and responsibilities of the operator (lessee) and landlord (lessor), entitlements for landlord inspections, appropriate rent levels and annual increases, how to assess trading figures and returns, and how these relate to market value.

The broker plays an integral part in any transaction as they are the only person who can talk to all parties.

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THE SECURITY & REASSURANCE YOU WILL GAIN BY DEALING WITH PROVEN EXPERTS IS INVALUABLE

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BEING A SUCCESSFUL MOTELIER SOAP

Successful moteliers really enjoy working with people. The objective SOAP is to build great relationships with your guests so they become repeat clientele, and happily recommend your motel to others.

You don’t need to be experienced in the accommodation industry or the wider tourism sector to be successful in the motel business. You don’t even need any particular qualifications. Some of the best motel operators we’ve known came to the business from entirely unrelated backgrounds.

Experience as a tradesperson or handyman, for example, might mean you save lots of money on upkeep, and always present the property in tip-top condition.

A background in marketing or media would be a great advantage when working to keep your motel in the limelight. And having business or bookkeeping know-how will help you keep track of costs and present an impressive set of books when the time comes to sell.

Most important of all in running a successful motel, however, is having a friendly face behind reception, offering guests a warm welcome and efficient, personal service that makes their stay with you one to remember and repeat.

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WHERE TO NOW? SOAP

If you’re considering a future in the motel industry, you can be confident ResortBrokers is very well placed to point you in the right SOAP direction.

We will be the vital linchpin you need, not only to help find the right motel for you, but to expertly guide the process, ensuring your move is achieved smoothly and successfully.

Because ResortBrokers has been a specialist in the accommodation sector since 1985, you can be assured of our experience. In fact, we were the first commercial agency in Australia to focus exclusively on accommodation business and property sales.

So, when it comes to motels, and other accommodation properties including management rights, hotels, serviced apartments and caravan parks, you can have absolute confidence we are the experts in our field.

And, because we are truly national, with an integrated network of specialist brokers active across all states and territories, you will have access to more properties across the broadest market.

Finally, our long experience means we know all the best industry professionals you’ll need to manage and safeguard your purchase.

RESORTBROKERS – RIGHT PROPERTY, RIGHT PEOPLE, RIGHT AWAY.

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GLOSSARY OF TERMS Add Backs : Any expenses in the Profit & Loss Statement that would not apply to an incoming purchaser. For example, if the vendor has a mortgage, their interest payments would be listed in the P&L. These would be considered an ‘add back’, as they would not be a cost the incoming purchaser would incur to run the business.

Adjusted Net Profit : The net profit after add backs.

Chattels : The items of the property that do not form part of the structure. They generally include all furniture, soft furnishings and décor items, ie. all the portable items required to run the business. An inventory of all chattles included in the sale should be attached to the contracts.

Due Diligence: Comprehensive investigations to appraise the motel’s assets and liabilities, evaluate its commercial potential, and verify the legal and financial aspects of the proposed transaction.

Freehold Going Concern: A motel in its entirety, comprising the land and buildings as well as the business operation. The property and business components have not been split.

Freehold Passive Investment : The term used to describe the ownership of a motel property (land and buildings) where a leasehold motel is operated by a lessee.

Lease : The contractual arrangement by which the motel operator pays the landlord for the use of their land and buildings. This longterm agreement formally documents the terms agreed between the lessee and the landlord.

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Lessee (also referred to as the tenant): Owns the leasehold motel business and pays annual rental to the lessor.

Lessor: Also known as the ‘passive investor’ or ‘landlord’, the lessor owns the land and buildings and receives rent from the lessee.

Options: Most lease agreements are made up of an initial fixed term followed by a number of ‘options’. These are provisions entitling the lessee to renew their lease at stated intervals, provided they have complied with all their obligations under the lease.

Rent: The sum of money stated in the lease document to be paid (often monthly in advance) by the lessee to the landlord for the use of the land and buildings.

Return (also referred to as a yield): When you buy a business, you not only buy its assets, but also the right to all profits the business may generate. Capitalising annual earnings is the most common method used to value a caravan park business, using the rate of return on investment (ROI) a buyer can expect to get from the business. Adjusted net profit is capitalised at an agreed rate of return (based on industry standards).

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