by Andrew Morgan, Motel Broker/Partner, Qld Tourism & Hospitality Brokers
02nd December, 2020
Tips for Buying Motels
Motels: You’re in Charge!
It is the dream of many to be their own boss. Not having to answer to anyone has real appeal. Making your own decisions without being questioned and overwritten. These dreams apply to many businesses including motels.
Owning a leasehold or freehold motel means you, as the owner can make your own decisions and stand by them. A common misconception is owning a leasehold motel means you must answer to the Lessor. However, this is not the case as the Lessee is entitled to “quiet enjoyment” under the terms of the lease, meaning they rent the building to operate their business without the intervention of the property owner. Obviously, there is a mutually beneficial relationship between the two parties, for both to have a successful motel business and property.
More than ever, there is a greater desire to find flexibility in the workplace, so look no further... Motels are a great business option for those wanting flexibility. Your work hours can be tailored to suit, and having your family live onsite allows for more family time, while still being able to operate your business. No driving 20 mins (or much more) each way, every day to get to work and losing an hour of your day.
Financially, motels have been a very lucrative business option for a huge number of people over the long term. They have also been very rewarding and satisfying on a personal level, making them the ideal business for many.
Start the ball rolling...
Research the web, this is a great place to start for any initial enquiries but sorting good information from bad requires further investigation and patience. Talk to friends or relatives who are, or have been in the industry, speak to experts but not those who “dabble a bit” and want to try to sell anything and everything. Consult those who specialise in the motel industry and have a proven longevity, not just those who come and go.
The options available to you are many and varied. Although, going with a very common idea, of where one wants to live is generally not the best place to start. Instead, look at regions that offer the best motel opportunities. Can those areas fit in with the family or lifestyle requirements one has?
Consider, the preferred tenure of ownership that may suit you best. The main three types of ownership available for motel acquisitions are Freehold, Freehold Passive Investment and Leasehold, each offers different benefits and burdens to the owner and one must determine which suits. Weighing up the facts and comparisons between them will help determine what is suitable for each investor.
Gaining some form of finance “pre-approval” can save a lot of wasted time and effort. This can only go so far of course, as each lending situation will be different. Guidance on what you can and cannot purchase based on your financial capacity will be invaluable. Other factors such as serviceability will need to be dealt with on each individual business.
Another main decision that is required to be made early on, is whether you are going to operate the business yourself or not. This may affect the type of tenure that should be considered. It was the case 20 years ago that most motel owners were also the operators living on site, this is not always the case today with many operated on a more passive basis either under management or under lease. Motels are an excellent business in this respect as they can be operated successfully without the owner needing to be onsite all the time.
- Number of units – for some the number of units is all important, others not so. Individuals should determine how many units they wish to operate and then work towards that. The budget that is available will also affect this decision as more units, generally means the higher the price.
- Restaurant/dining – love them or hate them, this is the more social side of the business where operators can get to know and build relationships with their customers. Perhaps influencing the decisions guests make as to where they will stay next time they travel to the locality.
- Standards/presentation – the standard of the presentation of a motel will affect the return on investment expected by the market. If hundreds of thousands of dollars are required to rectify poor standards or years of neglect, it will affect the price that is paid for the property in its current state. Motels that are not presented in the best manner can offer excellent opportunities to add value to the business/property by rectifying areas in need of work.
- Location – the main locations that motels tend to be positioned are major highways, main roads, waterfronts and city centres. These areas tend to be places where demand for accommodation is at its highest. Location does play a role in determining the value of a motel as the demand for a coastal motel has historically been higher therefore pushing the value of the motel higher and the return on investment lower.
- Residence – motels usually offer an onsite residence. However, one must be aware that although they are comfortable and large enough, they are generally not the size of a stand-alone house. There are substantial benefits to living onsite that include the lifestyle of a family living and working together, and the tax benefits that are available. The costs of living in a home in the suburbs are largely absorbed by the business in the case of a motel, such as food, electricity, council rates, rent, loan repayments, water, insurance, telephone, and much more.
- Online reviews – read but be careful what you take on board. The main thing is to consider the tone of the reviews and how they read, rather than individual reviews. If there are nine reviews on a motel that are positive and one that is not, then go with the nine, as that tenth review may not be legitimate. If nine reviews mention a specific issue with a property/business then consider just how big of a problem it is, and how easily it can be rectified. Sometimes issues can be easily fixed by a new operator, and therefore may be to the benefit of the buyer in the future.
- Lifestyle – again the benefits of a family working together and the opportunities to grow with the business can be very rewarding. Delegating certain areas of the business to key staff members where one is comfortable to, allows more time to get out of the property and take time out for family, schooling or other social or sporting activities.
- Potential/opportunity to value add – the old saying is “no one buys a business unless they see potential”. There is generally potential in every motel business of some kind. Often investors fall into the trap where a motel operates on a very high occupancy rate, so they think there is no upside potential. This is sometimes the best potential as the room rates allow for increase resulting in a lower occupancy rate, but higher profit margin, less wear and tear, etc. A new broom always sweeps clean and a new perspective, vision and enthusiasm offers the opportunity to take a motel business to the next level. See what areas of the motel are underperforming? What new initiatives can be implemented to gain more market share? What areas of expenditure are too high and can be brought under control? An injection of funds to do a refurbishment that the previous operator did not want to do is a proven method of adding value to a motel. This is an area where one can take a position of advantage over competitors who do not reinvest back into their asset.
- Finance – historically motels are known as solid and secure investments and therefore financial institutions (in the main) are eager to lend against them. They will generally lend 50 percent against the value of a leasehold motel and 65 percent against the value of a freehold motel. These percentages offer a good base to start searching. The balance percentage plus purchasing costs will need to be made up of preferably cash, or part cash and part equity against another property depending on the financial institution’s requirements.
- Purchasing costs – the cost of doing business can be high. Government stamp duty accounts for the largest portion of purchasing costs. Other costs include legal fees for advice throughout the purchase process, search fees for the property and business such as council searches, liquor licence, vendor entity, etc. Further costs can then include settlement adjustments for prepaid advertising, council rates and also the purchase of Stock at Value in order to continue to operate the business. Working capital will also be required, even though motels are strong cash flow businesses.
- Cashflow – in most cases and depending on the time of year the first day of taking over a motel generally results in a good cash flow. Most guests today pay by credit card or Eftpos. Guests on accounts are more limited to large companies only (of whom many are tending towards credit cards now). The type of clientele the motel has will have an impact on the cashflow.
- Return on investment – this depends on many of the items included, such as location, standard of presentation, number of units, lease document, land area, etc. Outside the business/property itself, the strength of the market and demand at that time plays a major role. Motels do offer very strong returns when compared to many other business opportunities.
- Future resale – when it is time to sell there is generally a ready market for both leasehold and freehold motels. If priced accurately most motels will sell within a reasonable time frame in normal market conditions when marketed correctly. If overpriced, they will not sell until the seller’s price expectation meets the market.
- Who is in charge – many Lessee’s are unsure about their rights and the rights of the Lessor in a motel lease. As mentioned, the Lessee is entitled to “quiet enjoyment” of the property.
- Rent – the annual rental of a motel should never be more than the Net Operating Profit After Rent. A new lease should have a commencing rental of approximately 40 percent – 43 percent of the entire Net Profit for the complex. There are other methods for determining motel rentals such as a percentage of Turnover. A dollar figure per unit site is often utilised as a check or comparison method.
- Lease time – motel leases mainly commence as a 25 or 30 year lease (inclusive of option periods). These are very long leases especially when compared to retail and commercial tenancies which are often 3 year + 3 year leases. Even a lease that has been in place for 10 years that has 15 years remaining, is a long-term lease. It is rare that motel leases ever run down too low as it is in both Lessee and Lessor’s best interests to have a long term lease in place for the security of each party’s investment. The opposite may occur if the site is ripe for redevelopment, however there are many if’s and but’s in this situation.
- Lease terms – the terms of the lease and responsibilities of both Lessee and Lessor should be considered and advice sought from an experienced motel solicitor in regard to whether the lease is reasonable or too onerous on either party. Most motel leases are drafted with standard terms however may not necessarily end up that way in final copy. It pays to make sure one is happy with the lease document prior to entering the agreement. As with anything, as long as both parties act reasonably regarding leases and their terms, then both parties benefit in the long run.
- What am I buying? The right to lease the land and buildings for a certain period of time on specific terms and the tangible and intangible assets of the business. This can include goodwill such as the reputation the business has built up, the telephone numbers, email addresses, websites, social media profiles, the business name, the Plant and Equipment, the right to the liquor licence being transferred, etc.
- Finance – the cost to purchase a Freehold motel is substantially higher than a lease simply because the land and buildings are also being acquired. The interest repayments will be much higher so one must ensure that the business’ cashflow can cover the required loan repayments. There are many benefits to owning and operating a freehold motel and many people purchase a lease motel in the first instant to build up funds and their experience, with the ultimate goal of acquiring a freehold motel.
- Land area and spare land for expansion – generally motels on a large parcel of land are sought after by the market. Any with spare land offer the opportunity to expand and increase the number of units, income, profits and value of the business and property. Being able to add value to a motel is a big incentive for those who wish to build up the value of their investment.
- Passive investments – the ownership of the freehold and business of a motel often leads to the owner selling the business to another operator and retaining the freehold property as a passive investment. The comfort and confidence in the strength of the motel industry often results in motel owners wanting to keep an investment in the industry whilst moving on to operate another motel acquired, or taking life a bit more easily whilst receiving a high return on their investment.
When researching motels as an investment or lifestyle opportunity, speak with experienced industry specialist professionals with a long association in the motel industry. Once a suitable motel has been found, always complete a financial and legal due diligence of the business and property to confirm all is as expected.