THE CHECK IN The Latest in Hotels, Motels and Holiday Parks
ISSUE NO 01
Before you consider investing in an accommodation asset, you need to look carefully at which type of business will suit your needs and objectives and, most importantly, which operating model will deliver your desired results. There are basically four main operating models that dominate the accommodation sector – Hotel Management Agreements, Leases, Management Rights and Serviced Apartments. We’ve been in business for 35 years and what that means is we are focussed on helping buyers, sellers, operators, developers and investors navigate the various options. When choosing which operating model is best suited to your needs, you need to ask some key questions such as “what are you trying to achieve?”, “are you self-funded or do you need finance?” and “what type of returns are you looking to achieve?”. When it comes to operating models, ResortBrokers is entirely neutral – that means we don’t advise which model is ‘best’, but rather we try and nominate a model that is ‘best for you’ based on your own circumstances. HOTEL MANAGEMENT AGREEMENTS Also known as HMAs, this is the traditional arrangement favoured by most major hotel brands. Under this model, the operator manages a freehold owner’s property on their behalf, typically for a period of 10–15 years. Terms of the agreement are negotiated, stipulating detailed arrangements between the owner and operator. The operator’s remuneration is by way of fees, generally made up of a guaranteed base amount, calculated as a percentage of revenue from the hotel business, and a performance incentive element paid if gross operating profit exceeds an agreed threshold. The owner's obligations to provide working capital or otherwise finance the operation of the hotel (including
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according to accepted industry formulas based on projected net profit, with stipulated CPI increases and rent reviews. Rent is generally paid calendar monthly in advance.
We understand all accommodation models fitting out the property to the operator’s required brand standards) should be clearly addressed in the agreement. HMAs generally provide the best potential to attract interest from hotel groups which gives you a wider choice of operators to choose from. THE LEASEHOLD MODEL This is one that ResortBrokers pioneered in Australia in the 1980s and, as we mentioned in our article on the back page “Splitting a Property”, it allows for properties to be split into two components – a freehold asset for passive investors or landlords and a leasehold asset for
the business operator. A leasehold is sold by a landlord to an operator (lessee) who conducts the day-to-day management of the business and often lives onsite. As their own boss, they aim to build occupancy and tariffs for maximum net profit. They’re responsible for all operating costs and pay the property owner an annual rent for the use of their land and buildings. While lease documents vary, generally the leasehold operator is responsible for the supply and upkeep of all ‘chattels’ needed to run the motel. Typically a lease is struck on a term of 25 to 30 years. Rent is set
MANAGEMENT RIGHTS Born out of the high rise towers of Queensland’s coastal resorts, management rights is now gaining popularity across Australia, especially with big hotel operators as it affords them a lot of keys for a relatively small outlay. This operating structure is also very low risk. Management rights typically include the ability for an onsite manager to earn fees from letting out apartments in a strata titled building as well as earning a salary for managing day-to-day duties such as cleaning. The value of a management rights business is generally calculated by applying a multiplier to its annual net profit. We deal with a lot of experienced operators who are very keen to buy management rights especially for offthe-plan developments. SERVICED APARTMENTS These are typically found in purposebuilt complexes with professional onsite management. Most of the major operators offer a mix of studio, one, two and three-bedroom units, all with one or more bathrooms, living area, kitchen and laundry. According to an IBISWorld March 2020 report, the serviced apartment industry in Australia has a 25 percent market share and is worth $4 billion a year. These can be operated under a variety of models including leasehold, franchise agreements and management rights and are one of Australia’s best performing commercial property investments. When it comes to operating models, choosing the right one can be an overwhelming task. At ResortBrokers, we are here to help you understand which model best suits your particular needs, based on your unique circumstances. END