All markets fluctuate. None stay at the top forever and none at the bottom. Motel leases are no different. Having been very popular for such a long time it was inevitable that they would not stay that way forever. With freehold tenure seeing most of the interest in the market in more recent times for various reasons, leases took a back seat for a while. Again though, all markets fluctuate and interest in leases is starting to come back around.
Leasehold motel ownership has been a success story across four decades now. It grew very quickly throughout the early to mid-nineties and has remained an attractive option for motel ownership for very good reasons. The many benefits of owning a motel lease are why many moteliers continue to expand their motel investment portfolios.
Changes within the motel leasing industry in recent years has had some positive influences as a result. This has largely been on the back of changing market perceptions and the industry adapting to “accommodate” these changes.
Over an extended period, the benefits of owning a leasehold motel business have held up. Leasehold motel businesses satisfy the main buying motives of any business investor - financial, lifestyle and security.
Financial Benefits
- High ROI – The return on investment (ROI) for motel leases is strong and in the main range upwards from 28 percent (most are within 30 – 35 percent) depending on certain factors such as location, length of the lease, level of rent, economic strength of the region, property presentation, strength of business, etc.
- Low Capital Outlay – A motel lease does not require one to buy the land and buildings of the motel. This is the larger value component of a motel and buying the property therefore increases the capital outlay considerably and reduces risk, and therefore return.
- Financing – The lower capital outlay means the loan required will be substantially lower. Lower loan repayments and fewer sleepless nights for those not wanting to borrow to buy freehold. Banks are historically very comfortable lending for motel acquisitions as they are solid and secure businesses.
- Taxation Benefits – This is dependent on numerous factors such as how the ownership structure is setup. The benefits of living out of the business include but are not limited to, whatever costs one incurs living in their stand-alone home such as insurance, electricity, rates, food, beverages, telephone/internet, rent/loan repayments, motor vehicle costs, etc.
- Quality Presentation – If a budget to buy a motel is one million dollars, the opportunity exists to buy a much larger and higher quality motel property under lease, than a freehold motel at the same budget.
- Long Lease Tenures – On most occasions’ leases commence as a 30-year term inclusive of option periods. This is a very long lease tenure offering the lessee long term security to operate the business.
- Strong Cash Flow – Upon commencing operating a motel there is an income from day one depending on the level of occupancy. An operator will achieve a certain level of cash flow immediately as most guests pay by credit card.
- Limited Stock on Hand – Motels carry very low amounts of stock. Motels with restaurants will carry more stock than those without depending on the size of the food and beverage operation.
- Ready Market – When the time comes to sell there is a competitive market to acquire motel leases.
Lifestyle/Personal Benefits
- Easily Operated Under Management – Motels are comfortably managed by a couple, so if an owner decides they would like to step back from the business for a while, there are many good management couples available who can manage a motel.
- Onsite Residence – Offers a home to live on site for the family allowing more family time together whilst operating a business. Children can also get involved and start experiencing the industry at a young age.
- Downtime During the Day – Motels are generally busy until late morning and again from late afternoon. The time during the middle of the day offers some downtime for the operator.
- Building Customer Relationships – For those who enjoy building customer relationships, motels can offer a lot of repeat clientele if the guest is looked after. There is a lot of personal satisfaction gained when a customer keeps coming back regularly because they are happy with the service being provided.
Security Benefits
- Long Term Leases – Often leases commence at 30 years in total split up with option periods. The ability to extend leases as the term of the leases diminishes is often available.
- Lease Terms – Leases are predominantly set up on mutually beneficial commercial terms to the Lessee and Lessor and therefore work very well. The clearer these terms are, the better for both parties.
- Asset Ownership – Includes the title to all the plant and equipment in the motel and the remaining tangible and intangible assets such as business names, contacts and goodwill.
Andrew Morgan - Qld Tourism & Hospitality Brokers
