Motels are located throughout Australia and range from small to very large operations. There are small to medium motels, and 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 Investment: Owns the building and receives rent from the business operator
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.
Going Concern: Owns the freehold and business
How are they valued? The value of the motel leasehold is determined on the following items:
- Location of the motel
- Length of the lease
- Strength of the Net profit
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 65% against a freehold motel
- Financiers will lend up to 50% against the leasehold motel
Both of these ratios are subject to criteria such as:
- 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.
Leasehold finance example
Purchase price $700,000
Less cash $427,000
Income $175,000pa (25% ROI)
Less $350,000 – P & I over 15 years $35,442pa
Where is the income generated from?
- Renting out the room is the main source of income
- Sale of Tours to guests
- Food & beverage sales
- Leasehold – You should allow 11% of the purchase price to cover your costs
- Freehold – You should allow 7% of the purchase price to cover your costs
- 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 and finance. The longer the lease, the greater security you have on protecting your business. Any terms less than 10 years will reflect 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 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?