Motels

Motels are located throughout Australia and range from small to very large operations. The small to medium motels are generally operated by a working couple who live on site and manage the motel. The larger motels are sometimes run by large corporate operators.

 

Freehold Motels:
Refers to a motel where the operator owns the building and business (or lease).Can be referred to as a going concern

 

Leasehold motel:
Refers to a motel where the operator owns the lease and pays rent to the landlord. Purchasing the leasehold requires less capital than you need to purchase the going concern.

How are they valued?
The value of the motel leasehold is determined on the following items:

  • Location of the motel
  • Length of the lease
  • Net profit x 3 times (depending on the quality)
  • Competition
  • Rent
  • Age

What security is required?

  • The financier will take a mortgage over the lease and will require a deed of consent to be signed by the landlord. The financier will also hold a mortgage over any other supporting property you offer as security.

What finance can be arranged?

  • Financiers will lend up to 70% against a freehold motel
  • Financiers will lend up to 55% against the leasehold motel

Both of these ratios are subject to criteria such as:

  • Experience
  • Location
  • Equity position
  • Cash Flow
  • Term of the lease

The financier will structure the funding over the term of the lease (up to a maximum term of 15 years). Some financiers will provide a period of interest only or a combination of principal and interest along with some debt on interest only.

 

Where is the income generated from?

  • Renting out the room is the main source of income
  • Sale of Tours to guests
  • Food & beverage sales

Costs

  • You should allow 10% of the purchase price to cover your costs to purchase the motel. This would generally cover the stamp duty, lawyers, accountants, bank, licences, rent in advance.

Term of lease:

  • The term of the lease will have an impact on the value of the leasehold motel. The longer the lease, the greater security you have on protecting your business. Any terms less than 10 years should reflect in a lower price than a lease of 25 years.
  • The landlord may require a fee to extend the lease. Some landlords may charge a fee of approx $10,000 for every year you want to extend the lease. This will depend on the terms of the extension.
  • The term of the lease can be any length, with a standard lease up to 30 years.

Rent

  • Rent is payable to the landlord if you own the leasehold. The amount of rent will depend on the location, size of the motel, value of the freehold.
  • The lease will set out the amount of rent that is normally subject to CPI (Consumer price index). Rent is normally paid in advance

Tips on some questions you should establish

  • What competition is likely to be built in the future, or new roads ?
  • What competition is currently operating in the surrounding area?
  • When was the motel last refurbished?
  • What is the star rating?
  • Is the motel structure sound?