by Andrew Morgan
03rd July, 2018
Tenanted motel investments
The high return and low risk offered by motels as a tenanted investment was pinpointed by many savvy investors over twenty-five years ago.
In its infancy, in the early 1990s, some leases were put in place that were not suitable for either party involved. These teething issues were largely ironed out by the mid-90s. Since then, demand for motel investments has been strong.
Today, we find they are rarely available on the market and are a tightly held commodity. With the high volume of motels that operate under a lease, it is surprising just how few tenanted investment motels are ever on the open market for sale at any one time. When they do come onto the market, they do not remain available for long, generally selling quite quickly.
In the early stages of leases being put in place over motels, it was largely only former or existing motel owners/operators who were interested in investing in motels as passive investments. They knew the industry well, they understood how a motel was operated and they knew travellers always require accommodation, no matter what the reason for their travel was: business, work, pleasure, etc. The wider investor market had not considered investing in motels, and not having any history or dealings within the motel industry, were not that interested.
However, over time, as the high return and low risk benefits of motels were more recognised, interest started building in the motel industry as a tenanted investment opportunity from other investor markets. Investors who had previously focused on residential, commercial or industrial properties, were now looking at the benefits a motel investment offered. Corporate investors as opposed to the traditional ‘mum and dad’ investor entered the industry in a big way. Many of these larger entities own numerous motel properties and even the smaller individual investors have continued to add more motels to their investment portfolios. Self-managed superfunds have become a popular investment vehicle for investors to purchase their own motel, with a secure long term lease in place.
Bank interest rates over recent years have assisted to increase the demand for passive investment motels where cash in the bank at its current interest rate levels is not an attractive investment option.
Benefits that have attracted the interest of the investor market to motels as tenanted investment options are:
High investment returns – Investors have achieved excellent returns on passive investment motels over the years. Market net returns on passive investment motels are currently at approximately nine percent plus on capital invested. The return to an investor compared with other investment options such as cash or residential property make them very attractive to a number of investor types.
Low risk – Motels have proven themselves over the years to be very low risk investments. Solid and consistent businesses in general operating from an investors building is what anyone is looking for. Good locations in busy positions often means the investment is underpinned by a strong land component.
Fully tenanted – One way or another, a motel property that is leased almost always has a lessee, as opposed to other investment options. If a lessee/operator was to close the doors of the business the mortgagee would almost always appoint an operator to reopen until the business was on sold. The alternative is that the property owner operates the business themselves or under management until the business is on sold.
Freehold tenure/increasing land values – Freehold tenure and the ownership of a tangible product, being a commercial property. Motels are generally located on busy main roads or other desirable locations which are larger blocks of freehold land that increase in value over the longer term.
Solid building structure – Motels are typically of brick/block construction and this type of structure requires minimal ongoing works. Any move away from this type of structure to more cost saving types of building materials/construction means an adjustment in the maintenance requirement to be budgeted for over time.
Outgoings – Generally within motel leases the lessee pays all outgoings. Outgoings paid by the lessee include, but are not limited to property rates, insurances, repairs and maintenance, and electricity. Leases were originally set up this way so that the Lessee had control of his/her own business and did not have to go to the property owner every time they needed a light bulb changed. The lessor may be responsible for a few items such as land tax (unless included as an outgoing) and structural repairs/replacements.
Building allowance/tax benefits – Relatively young buildings or those that have undergone major refurbishments (capital works) will have some level of building depreciation or write off allowable. This will vary for each property; however, the tax benefits in many cases can provide good taxation relief to the property owner.