Extending leases: Who holds the value?

Andrew Morgan

20th of March, 2020
Extending leases: Who holds the value?

Further to last month’s column “What is a long-term lease”, this issue looks at what is involved in extending existing leases. The extension of motel lease terms is such a hot topic that it comes up in discussion with people in the motel industry and those looking to enter at least once a week.


As mentioned, often the extension of an existing motel lease is a positive for both Lessee and Lessor. However, there are those times where one may not wish to extend a lease when the other does, such as where the site is ripe for redevelopment, or a motel is no longer the highest and best use for the site, or where the rent has become excessively higher than the fair market level. It is important to note that both Lessee and Lessor will have their own agenda when it comes to the term of the lease, and those agendas may not always be compatible.


Leasehold tenure is obviously not the same as freehold. Predominantly they do not go on in perpetuity, they have an end date. This is one of the main elements of a lease, such as paying a rental, that makes it what it is. Therefore, leaseholds can be purchased at a much lower price level than a freehold motel, allowing motel operators to access the market and industry on a lower capital investment. Extending the lease pushes that end date out further, effectively providing more security to both parties.


In general terms the main benefits to both Lessee and Lessor are largely the same in principle:

 

  • •    Higher security of tenure
  • •    Greater value added
  • •    Easier to sell in the market
  • •    A stronger financing or refinancing position


When selling a motel lease, the term will play a role in determining the value of the business and the time it takes to sell that business. Short-term leases often take longer to sell and the return on investment demanded by the market is much higher. Security of tenure for those buying is under question with a short-term, therefore the market diminishes and consequently they require a longer marketing period. Those motel buyers demanding a long-term lease often have a longer-term vision for the business, which is beneficial for the Lessor as well.


Financing or refinancing is an important reason to maintain long-term leases for both parties. The security of a long-term lease that can be offered to a financial institution can mean a much stronger bargaining position from a lending perspective. A very good client of mine since 1997 who has owned numerous freehold motels with leases in place over that time, has always looked to extend his leases. The reason he does this is that he is continually putting pressure on his financiers for better interest rates and lending terms. The longer- term leases that he keeps in place give him additional bargaining power when he is chasing even the smallest interest rate reductions on any of his loans. He does not like his leases to fall below 15 years remaining, instead preferring them to be above 20 years and demonstrating a better product in the eyes of his financiers.


In the majority of cases extending lease terms involves a consideration being paid by the Lessee to the Lessor. Either party can request an extension of time from the other, being a demand for a product, and the other can supply that product being if they wish. That request is most often from Lessee to Lessor however it can be vice versa also, depending on the circumstances. Usually the Lessee requests an extension and a negotiation will commence between the parties. The amount of this consideration is not set in stone and the “sales evidence” in the marketplace varies greatly. It comes down to a negotiation between the parties, often based on, “at what level is it worth it to us to extend or not”. A financial decision is ultimately based on the value of the asset/benefit acquired.


As always, when both parties act reasonably, matters of discussion between Lessee and Lessor can be resolved to the benefit of both. The extending of motel lease terms is one of those matters.

About the author


Andrew Morgan

  • sales@qthb.com.au

Comments Section

comments powered by Disqus
Sought after leasehold motel business in Mid North Coast regional centre
Swansea Motor Inn - 1P5411
Only 750m to this Sunshine/Cooloola Coast City's Major Hospital - 1P5442M
RESORT OPPORTUNITY ABSOLUTE BEACHFRONT!! 457K Net profit.
SAPPHIRE COAST LEASEHOLD MOTEL WITH MAGNIFICENT VIEWS | Resort Brokers ID : LH007076
Waterfront Off The Plan MR on the Redcliffe Peninsula - $338K projected net | Resort Brokers ID : OTP007090
Bullet proof Warwick performer | Resort Brokers ID : LH007088
High performing holiday letting business in boom Southern GC location! | Resort Brokers ID : MR007084
1838ML - GATEWAY TO THE GRAMPIANS GEM
27 High Quality Rooms with Huge 3 Bedroom/2 Bathroom Residence Overlooking the Golf Club Fairways - 1P5440M
STUNNING MANAGEMENT RIGHTS COMPLEX IN THE HEART OF MOOLOOLABA.
Outstanding 25 room Freehold Motel in Biloela | Resort Brokers ID : FH007086
New Lease on Large Tourist and Cabin Park in a popular tourist destination | Resort Brokers ID : LH007083
Brand new 30 yr lease - 41 room fully refurbished regional motel and restaurant | Resort Brokers ID : LH007078
Fully refurbished, 41 Room Freehold Motel located in major regional centre in SA | Resort Brokers ID : FH007077
Business For Sale - The Perfect Beachside Location - ID 9042 BL
Business For Sale - Rare Opportunity in Prime Location - ID 9043 BL
UNIQUE MANAGEMENT RIGHTS IN HERVEY BAY WITH SOLID ROI | Resort Brokers ID : MR007060