Motels Made Easy A comprehensive guide
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S T N E T N CO 04
Introduction
05
What are motels?
08
How much can I spend?
10
What is the process for buying a motel?
12
Who can help me when buying a motel?
15
Being a successful motelier
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Glossary of terms
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Introduction This informative guide is designed to provide newcomers to motels with a sound overview of the industry. We help you understand what motels are, how they are sold, and what they can offer you. These pages will also reveal some enlightening tips on what to look out for and some things best to avoid. If you are considering a future in motels, you can be confident we are very well placed to point you in the right direction. In fact the motel lease is quite literally the foundation on which Resort Brokers Australia’s 30-year record of service to the accommodation industry is built. Managing director, Ian Crooks, introduced and pioneered motel leases in Australia.
New life on leases! Originally from New Zealand, Ian had established a successful motel brokerage based in Tauranga, and owned and operated motels there with his wife Karin. “Motel leasing was accepted practice in New Zealand,” he recalls. “Then, in the eighties, lots of Kiwis started moving to Australia for better opportunities and warmer weather.” Ian’s interest was piqued when operators he had sold out of motels started complaining they couldn’t buy motel leases in Australia. Leases simply didn’t exist. And therein lay an opportunity! Ian Crooks moved to Australia and founded Resort Brokers Australia in 1985 with the goal of introducing the motel lease concept here. He came armed with extensive motel industry knowledge and a meticulous approach to the task. “While we had motel leases in New Zealand, there were really no reliable formulas for setting them up and calculating values,” he explained “So, before coming to Australia, I gathered all the motel P&Ls I could. “I studied and compared hundreds of sets of figures to calculate industry average operating costs. Even 30 years later, I can say with confidence, the formulas I arrived at still work perfectly.” Ian vividly remembers the first motel lease he set up in Australia, the 17-unit Mary Ellen Motel at Ipswich, just west of Brisbane. Today, thanks largely to Ian’s initiative and resourcefulness, more than 70 per cent of Australia’s motels are split into active leasehold and passive freehold investment components.
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What are motels? Of course you know what a motel is … simply a place to lay your head or accommodation for travellers seeking comfort, convenience, good value and great service. But what do you actually know about the business behind the ‘no-vacancy’ sign? Motels are usually offered for sale in one of three ways – as a freehold going concern to an owner-operator, as a leasehold motel business, or as a passive commercial property investment.
+ Freehold Going Concern This is perhaps best described as the ‘traditional’ model of a motel – where one party is both the owner of the freehold land and buildings and the operator of the motel business. Prior to 1985, all motels operated this way. Now, fewer than 20% of Australia’s motels are Freehold Going Concerns. The owner-operator is responsible for all aspects of the motel, from property maintenance and room refurbishment to generating bookings and taking care of guests. No rent is payable, so the owner receives all profit after operating costs are covered. There are advantages to owning and controlling the accommodation business as well as the freehold land and buildings. As an owner-operator, your motel is both an income-generating enterprise and a substantial commercial property asset. It is a home and a business, providing security of employment and investment. You enjoy the best of both worlds. Each component – the accommodation and hospitality business and the commercial property holding – presents opportunities for growth. resortbrokers.com.au 5
The land and buildings form a key commercial real estate asset that, independent of the business, usually appreciate. The owner-operator is able to capitalise on the value of the property through improvements. The time and money you invest in the property, on upkeep and improvements will enhance its value. The value of the property also relates to how well the business is run. So, in this respect, the owner-operator is in control of their own destiny. Rather than relying on a lessee to protect the value of your asset through good business management, you are able to market and build the business for maximum profit and growth yourself. Owner-operators also have flexibility. If you no longer want to run the business, you can retain the freehold land and buildings while creating and selling a long-term, income-earning lease. For some, buying a motel as a freehold going concern, building the business and then on-selling the lease at a higher value is a worthwhile growth strategy.
Leasehold
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In this case, you buy a long-term lease to occupy the land and buildings of the motel to operate the business. Motel leases offer you the opportunity to buy a motel business for a much lower financial outlay than is required for a freehold purchase. The business is yours to market, manage and build for maximum profit and growth. The lease value is made up of three components – the purchase of the business (the lease term), the chattels (generally all portable furniture, décor and gear needed to run the business), and goodwill (the value attached to intangible assets like the motel’s reputation, regular client list, etc). The price of the lease is based on the net profit that the business is generating. Leases are sold based on the return (net profit capitalised at an industry agreed rate). The return percentage depends on factors including the location and condition of the property. The industry standard for most new motel leases is a term of 30 years. This is made up of a fixed term plus options (e.g. 10 years + 4 x 5-year options). Lessees, who pay their landlord an annual rent for use of the land and buildings, often live on site and undertake the day-to-day management of the motel. You are free to run the property as you see fit, as long as you pay the agreed rent and maintain the property in line with the lease agreement. The lessee’s objective is to grow occupancy and tariffs, thus increasing the net profit and, ultimately, the value of the business. resortbrokers.com.au 6
You are responsible for paying all operating costs, such as wages, rates and outgoings, and for the maintenance and replacement of all chattels necessary to sustain the goodwill of the business. You are also responsible for day-to-day repairs and upkeep, including painting and signage. The landlord is responsible for structural repairs and replacement of fixed items and equipment such as toilet and shower systems, built-ins, hot water cylinders, and any other structural items.
Passive Investment The success of the leasehold motel model has made valuable freehold motel properties available to passive commercial property investors. The owner of the ‘passive investment’ is also known as the ‘landlord’. The landlord owns the land and buildings on and in which the motel operates, but they have nothing to do with the day to day operation of the motel business. The landlord receives an annual rental income from the lessee. Depending on the terms of the lease agreement, this rental figure generally increases annually in line with CPI. Some leases include a rental review clause.* While general repairs and maintenance, rates and insurance are the responsibility of the motel operator, the landlord is responsible for all structural repairs and is expected to maintain the standard of the property for the duration of the lease. Motel properties are widely regarded as secure and lucrative passive investment opportunities because they are usually located in prime highway, coastal or CBD locations, and have secure, long-term leases offering attractive returns. Compare this with a commercial or industrial building where, if your tenant defaults, all you can do is put a “For Lease” sign on the building until you can find another tenant. In the case of motel investments, as there is an inherent value in a motel lease, your have a tenant who has paid a significant amount of money and is keen to be there. And your motel tenant will do a much better job of maintaining your building because it is their home and their livelihood. * NB. Practices can vary slightly in different states across Australia.
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How much can I spend? So, the prospect of buying a motel sounds good? What next? The starting point for every prospective motel buyer should be to work out exactly what you can afford to spend, and the level of borrowing with which you will be comfortable. The easiest way to do this is to speak with an industry expert – either a specialist broker (that’s us!) or experienced finance professional / bank. Consider the value of your assets. As well as traditional cash reserves, they might include the family home, shares, superannuation and other investments. Depending on your financial position, you might consider selling some of these assets to finance your motel purchase. As financial institutions look rather favourably on the motel industry because of the security of investment it provides, lending ratios are relatively generous. Banks will usually lend at least 50% of the total cost of a leasehold motel. For example, if you were to purchase a lease for $1,000,000, you would need to provide $500,000 and the bank would provide $500,000. For freehold (passive) investments, banks will lend up to 65% of the purchase price. So, if you buy an investment for $1,000,000, you will need to have $400,000 available and the bank will provide $600,000. In the case of freehold going concerns, because the bank will have the security of the land, buildings and business, they are prepared to lend up to 70% of the purchase price. This means, if you were to buy a freehold going concern motel for $1,000,000, you would be required to contribute $300,000 and the bank would tip in the balance $700,000. One of the most critical areas to look at is the serviceability of your loan. Banks usually want to ensure you can pay off your loan over 10 years, even if the term of the loan is longer. And although they may be satisfied you have ample security, they will also want to ensure you’ll have sufficient income to repay the loan and live comfortably.
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Indicative Bank Lending FOR EXAMPLE... Motel Type
Lending %
Leasehold
50%
$1,000,000 $500,000
$500,000
Passive
65%
$1,000,000 $650,000
$350,000
Freehold Going Concern
70%
$1,000,000 $700,000
$300,000
Sale Price
Bank Contribution
Your Contribution
A great advantage of motel investment is that the property can be both home and business, which means you can enjoy considerable saving on your cost of living. If you live on site, utilities and many other costs are put through the motel as business expenses.
+ Costs of purchase You will also need to budget for the anticipated costs of purchase. Banks don’t generally lend for costs, so you will need to know you can cover such things as loan establishment fees, legal costs, accountancy fees and stamp duty. As a rule of thumb, we suggest that you allow an extra 5 – 10% of the motel’s total price in addition to your equity portion of the purchase price.
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What is the process for buying motels? The process when buying a motel is well established and ensures a maximum degree of security over the purchase.
Heads of Agreement When you have inspected and found a motel you would like to purchase, we ask you to make an offer via a ‘heads of agreement’ form. This is a nonlegally-binding document that serves to formalise your offer. The form is presented to the seller, who may accept, reject or counter-offer. The process is repeated until a price is agreed (or not, as the case may be).
Valuation Some banks will require an independent valuation, carried out by a professionally qualified and licensed valuer.
Contracts Generally, once a price is agreed, the vendor’s solicitor will issue contracts. When both parties sign, the property is ‘under contract’. This process varies from state to state, however. In most jurisdictions, contracts are conditional for a period on finance approval and satisfactory due diligence. Elsewhere, in NSW for example, contracts are unconditional. So, ideally, buyers there need to do their evaluations and pre-arrange finance before signing.
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Due diligence Consequently, due diligence – a comprehensive appraisal to verify the motel’s assets and liabilities and evaluate its commercial potential – is undertaken either before or after signing the contract, depending on the state or territory.
Financial scrutiny This is the first step in the due diligence process. Your appointed accountant will review the property and financial information provided by the vendor. This is to ensure the income isn’t being overstated. Your accountant will provide a report detailing his or her findings. If discrepancies are found, a price adjustment may be warranted.
Legal The next step is for your appointed solicitor to verify the business is legally sound. This includes examining the lease document and conducting searches.
Finance The final step is for your chosen financier to provide a stamp of approval for your loan. Once this has been granted, the contract either becomes unconditional or an unconditional contract is signed.
Settlement Settlement of your purchase can happen within a week or two of finance being approved, depending on the individual situation. Often the settlement date is pre-agreed between vendor and purchaser.
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wyer
Who can help me with buying a motel? A motel is a unique and potentially complex type of business / property. We cannot stress enough how important it is to seek the professional advice of specialists who have direct knowledge and experience in the motel sector. Aside from your agent, who will be the vital linchpin through every step, there are some key people who will help you to make the right decisions and who will ensure that the sales process unfolds as smoothly as possible. They may not be your regular family advisors, but it is vital they are professionals who understand the finer points of the accommodation industry. The security and reassurance gained by dealing with proven experts is invaluable.
Finance Finance
Accountant
If you are dealing directly with a bank, make sure the representative looking after your business is someone who specialises in motels. Ask how many motel transactions they have handled previously. And remember, it is wise to obtain a few finance quotes to compare.
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ance
We highly recommend you consult a specialist finance broker. Contrary to common belief, using a broker will not cost you extra. In actual fact, because lenders expect brokers to shop around for the best deal, they will usually make an effort to ‘sharpen their pencils’. A broker will also know which lenders are most suited to the type of motel you want to buy.
Accountant Accountant Leasehold and freehold going concern buyers will need an accountant to check the books (ie. to verify the Profit & Loss Statement). Again, it is critical you engage a specialist accountant who has an intimate knowledge of the industry. This is a big investment for you. The value of the motel is derived from the profit it makes. So you must be 100% confident the business is making the money it claims, and that the income is sustainable. Your lender will require this security as well. A specialist accountant will have verified hundreds of motel P&Ls during their career. They know what to look for, and what rings alarm bells. They understand where operating costs and wages should be in line with industry averages. They can provide sound advice in the event of any discrepancies. Before going to contract, you should also ask your accountant about establishing the appropriate entities to suit your needs. The structure you use to buy the business can have significant tax implications; an industry expert knows how to set this up to maximise the benefits to you.
Solicitor Lawyer
Finance
Accountant
Buying a motel, especially a leasehold motel, is a very different kettle of fish when compared with other commercial real estate transactions. Only a specialist lawyer will truly understand the complexities. You need an expert legal eye overseeing the process, watching your back and helping you to understand any issue that may arise. As mentioned earlier in this guide, it is your lawyer’s job to scrutinise and ensure the validity of agreements that provide the security to the business you are purchasing. resortbrokers.com.au 13
Broker Make sure the broker you deal with is qualified for the job. Ideally, find out how long they have been in business, how many motel sales they have successfully negotiated and, where possible, speak to previous clients. An experienced motel broker will understand details a general real estate agent or business broker will not – the structure and implications of the lease agreement, its term, the duties and responsibilities of the operator (lessee) and landlord (lessor), entitlements for landlord inspections, appropriate rent levels and annual increases, how to assess trading figures and returns, how these relate to market value etc.
So... if you are considering a future in motels, you can have absolute confidence in Resort Brokers Australia. These are the facts ...
1. T he original and still #1 - Established in 1985, Resort Brokers Australia
was the first real estate agency to specialise in the marketing and sale of motels, management rights, caravan parks and hotels. Today, we remain the market leader in accommodation property transactions, selling more properties year on year than any other agency.
2. A truly national company - With an integrated network of specialist
agents nationwide, Resort Brokers Australia is the only fully licensed agency in this industry operating in all Australian states and territories.
3. I ndustry contacts - During our years in this business, we have forged
firm and lasting relationships with the best industry specialists. When legal, accounting, financial and management services are needed, we put you in touch with the right people, right away.
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Being a successful motelier Successful moteliers really enjoy working with people. The objective is to build great relationships with your guests so they become repeat clients and happily recommend your motel to their family, friends and business associates. You don’t need to be experienced in the accommodation industry or the wider tourism sector to be successful in the motel business. You don’t even need any particular qualifications. Some of the best motel operators we have known over the years came to the industry from entirely unrelated backgrounds. Experience as a tradesperson or handyman, for example, might mean you save lots of money on upkeep, and always present the property in tip-top condition. A background in marketing or media would be a great advantage when working to keep your motel in the limelight. Having business or bookkeeping know-how will help you keep track of costs and present an impressive set of books when the time comes to sell. Most important of all in running a successful motel, however, is having a friendly face behind reception, offering guests a warm welcome and an efficient, personal service that makes their stay with you truly memorable.
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Glossary of Terms Freehold Going Concern - A motel in its entirety, comprising the land and buildings as well as the business operation. The property and business components have not been split. Lease - The contractual arrangement by which the motel operator pays the landlord for the use of their land and buildings. This long-term agreement formally documents the terms agreed between the lessee and the landlord. Lessee - Owns the leasehold motel business and pays annual rental to the lessor/landlord. Lessor - Also known as the ‘passive investor’ or ‘landlord’, the lessor owns the land and buildings and receives rent from the lessee. Freehold Passive Investment - The term used to describe the ownership of a motel property (land and buildings) where the business/lease is operated by a lessee. Rent - The sum of money stated in the lease document to be paid (often monthly in advance) by the lessee to the landlord for the use of the land and buildings. Adjusted Net Profit - The net profit after add backs. Add Backs - Any expenses in the Profit & Loss Statement that would not apply to an incoming purchaser. For example, if the vendor has a mortgage, their interest payments would be listed in the P&L. These would be considered an ‘add back’, as they would not be a cost the incoming purchaser would incur to run the business. Due Diligence - Comprehensive investigations to appraise the motel’s assets and liabilities, evaluate its commercial potential, and verify the legal and financial aspects of the proposed transaction.
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Options - Most lease agreements are made up of an initial fixed term followed by a number of ‘options’. These are provisions entitling the lessee to renew their lease at stated intervals, provided they have complied with all their obligations under the lease. Return - When you buy a business, you not only buy its assets, but also the right to all profits the business may generate. Capitalising future earnings is the most common method used to value a motel business. The method uses the rate of return on investment (ROI) a buyer can expect to get from the business. Adjusted net profit is capitalised at an agreed rate of return (based on industry standards and market conditions). Chattels - The items of the property that do not form part of the structure. They generally include all furniture, soft furnishings and dĂŠcor items, ie. all the portable items required to run the business.
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“This Motels Made Easy” booklet has been compiled to give you a reference guide when making enquiries about the acquisition of a management rights business or when taking steps to acquire a motel business. This reference guide should not be used as a substitute for professional legal and financial advice. ResortBrokersAustraliaPtyLtddisclaimliabilityfromallloss,injuryordamageresultingfromany personactinguponorrefrainingfromactionorotherwiserelyinguponthisreferenceguideorthe material contained within or from any cause whatsoever. Nopartofthereferenceguidemaybereproduced,storedinaretrievalsystemortransmittedinany formorbyanymeans,electronic,mechanical,photocopying,recordingorotherwisewithoutthe express permission of Resort Brokers Australia Pty Ltd.”
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