Archive for September, 2008
One aspect of a motel business which is very important and often asked about is that of the Rent Review. All motel businesses which are operated under a lease will pay a rental to the lessor and this will be reviewed on a regular basis. This does not necessarily mean that the rent will be increased but gives the lessor the opportunity to review the current rental being paid.
In the rental situation it is human nature that the lessor will be wanting to get the highest possible rent as a return on his investment and the lessee will be wanting to pay the lowest possible rent and thus be getting the highest return on his investment. It is essential then that to prevent too many arguments the whole process of this review is detailed in the lease document and each party is required to abide by their obligations under this. The lease will stipulate the frequency of the reviews, the requirements of both parties during the review process and the remedies available to each party should they not be able to agree on a rental.
The most common period for a rent review is on a two yearly basis. A new lease for a new motel complex may have an initial rental which is set to allow for the building up of the new business and clientele. This initial rental may be reviewed after 12 months but then once established the rent reviews are generally on a two yearly basis.
Rent reviews are normally based on market conditions and current rents being achieved in motels of a comparable size and standard. Some rentals however under the terms of the lease are indexed to the CPI and this will give the percentage increase for each rent review. There are arguments for and against each type of approach. It is almost impossible to find two identical motels to compare rents so often it is necessary to make adjustments for individual features or locations of each motel. The question then becomes how are these adjustments assessed and evaluated. The CPI indexed rental can be exposed to products within the CPI which have little or no bearing on the ability of the motel to earn income and thus can set an unrealistic rental.
In the past, it was always a standard term of leases that a ratchet clause would be incorporated in the lease document. In layman’s terms a ratchet clause means that the rental set at each review sets the minimum amount which can be payable on the next review. Basically the rent can always go up but can never go down. There has been a move in present times to have a limitation placed on the ratchet clause. It is now more common for an initial rental to be set and on any review the rent can be reduced, but will never be reduced below the original rental set.
Rental reviews are a matter of negotiation between the parties in accordance with the terms of the lease. The lessor needs to give notice that a rent review will take place in accordance with the required timeframe and often will assess a new rental and advise the lessee of that amount. Should the lessee object, they need to inform the lessor and try to convince the lessor that the rent should be at a different level to that which the lessor is requesting. If agreement can still not be reached then valuers are employed to assess a reasonable figure and often that is the end of the matter.
There are of course cases where agreement can still not be reached and mediation or arbitration must occur. The procedure for this is also often stated in the terms of the lease and makes the process transparent. This is however a costly exercise and one where there will always be a winner and a loser. This can create negative feelings between the parties and potentially destroy an otherwise good lessor/lessee relationship.
The big factor to remember in the motel business is that both the lessor and the lessee have a partnership type relationship. One can not succeed without the other. In order to build and cement this relationship the lessee should endeavour to inform the lessor of everything they have done to the motel. They should send an e-mail or give the lessor a call and tell them that they have just painted the rooms and they look great or they have redone the garden or bought new couches. The lessor will be more likely to be amenable if he is aware of the things the lessee is doing to put money back in to the motel and how well they are looking after his asset.
The other element to a rent review is that it is a two way negotiation. It is not just a matter of agreeing to either leave the rent as it currently is or increase it but can be a way of achieving things from the landlord in return. For example a lessee may wish to have more years on the lease term. This is an ideal opportunity to agree to an increase in rental in return for an extension on the lease. Another scenario may be work required around the motel. A rent increase can be agreed to and in return the lessor agrees to resurface the bench tops in the units or upgrade the bathrooms. The best result from a rent review is a win/win situation where the relationship between the parties is maintained and everyone is happy.
September 23 2008 | Articles for current moteliers and Entering the Motel Industry | No Comments »
10 September 2008
New Zealand owned & operated last minute accommodation specialist Ezibed.com was last night announced as a finalist in the Online Innovation category of the Hawke’s Bay Chamber of Commerce Business Awards.
Innovation is an important aspect for both attracting new customers and retaining existing customers says the company’s Managing Director, Gareth Pearce. The company that was founded in late 2003 has become a leading online accommodation booking website within New Zealand, recently expanding into Australia, Pacific Islands, USA and Canada.
With over 2000 registered accommodation providers, & over 50,000 visitors per month looking for accommodation, the company’s growth has been rapid. Ezibed.com recently launched its new customer focused service solution that allows users of the website to reach customer support through a live ‘instant message’ interface, allowing customers to communicate with the company without having to physically phone or e-mail for support, thus saving time. This was a New Zealand first for an online accommodation booking website.
The company also launched a free text message booking confirmation service to assist travellers who either cannot print their booking confirmations due to them already travelling and not having access to a printer or for same day bookings. All customers who provide a mobile phone number also receive a text message on the morning of their check out as a little extra touch.
With customer service a core focus for the company, Gareth Pearce says that the company is committed to keeping up with technological & consumer trends. “We are still building up our brand awareness within New Zealand, and trying to let people know that they don’t need to go to the Yellow Pages anymore to look for accommodation. If we can provide a fast easy to use website that consolidates all the accommodation in one area and the website has a human touch to it then we will retain our customers and our customers will be our marketers. We’ve already got over 26,000 sales reps out there” says Pearce.
Pearce says that understanding what their users want is critical to the ongoing success of the website. “Our focus is all about offering a quality service to our customers & also our accommodation providers that display last minute rates on our website. We continue to add innovative new features that allow us to engage with our users & this keeps us ahead of our competitors”, says Pearce. Ezibed.com is a New Zealand owned company, competing in a highly competitive environment with large international travel websites.
The company plans to extend into popular Asian cities before the end of 2008.
Press Information: For more information or imagery contact: Gareth Pearce Managing Director 31 Porangahau Road Waipukurau
P: +64 6 858 5442
September 10 2008 | Articles for current moteliers and Changes in Motel Trends and Entering the Motel Industry | No Comments »
A recent bad customer service experience has reinforced the fact to me of how important interactions are with customers and how they can make or break a business.
I have trouble coping with the new age customer service call centers which most large companies appear to have taken on as a necessity of modern times and my experience with one of the “Customer service representatives” yesterday did nothing to improve my beliefs. The short version of this story is that my daughter purchased a Hewlett-Packard laptop in February 2007. She has not had a good run with her computer and during the 17 months she has owned it she has needed to replace the battery charger four times. This hasn’t been an issue to date and I have to say Hewlett Packard have been very good at simply replacing the charger by sending a new one. That is until yesterday. When she rang yesterday she was told that her laptop was no longer under guarantee and she would have to pay for a charger. The last replacement charger was more than 3 months old and so no longer under guarantee.
As she is a young university student she was quite upset at the prospect of spending $100 on a new charger and maybe having to do this every four months. So being the good mother I try to be, I rang the Hewlett Packard customer service center to express my concern at what I considered to be a possible inherent fault in the lap top chargers. This is where I came across what I considered to be bad customer service.
After giving me his name, Mike, which was not a reflection of the accent I was hearing, the young man proceeded to tell me that as the charger was older than three months it was no longer under guarantee and they could not replace it. I should have known then to stop but I tried to make this “service” person understand that my problem was not their policy on replacements, but that it was the continual malfunction of these chargers which possibly reflected an inferior product when comparing them to other laptops on the market.
He simply repeated that they could not replace the item as it was out of guarantee. A fact I already knew as it was now the third time we had been told this. I tried in different words to say that I understood that was the policy but this was not an isolated instance it was an ongoing issue with this laptop which I felt had not been fixed but just deferred until the guarantee was expired. The “service” representative replied “I do not want to repeat what I have already said.” Leaving me with the distinct impression he didn’t care and wasn’t hearing what I was actually saying.
After several attempts to get ‘Mike’ to listen to what I was saying I realized I was pushing the proverbial up hill and so asked to speak to his manager as I was not happy with the response. To my amazement I was told no one else in the company could talk to me as they would just be repeating what Mike had already told me. My next statement was that I would like the number for the complaints line as I was not happy about this process. Again to my amazement I was told that they did not have a complaints phone for me to ring. Dumbfounded I then asked “Is there no way I can contact Hewlett Packard with a complaint?” Grudgingly I was told that they only have an e-mail I could use if I had to. The e-mail address was not forthcoming though and I still had to ask for the details so I could contact the company. I was left feeling very frustrated, exhausted and angry.
This whole experience made me think of the cost of the item and the damage which can be created to a business by the customer service. I have now taken to print via the web with my disappointment and named the product and company. My daughter too has taken to print via the web. How much damage does this create for the companies reputation? Statistics show that 71% of people will change their mind about a product on the basis of another persons review. My review of Hewlett Packard doesn’t stack up well for them.
It isn’t just large companies who are affected by this, all businesses must offer exceptional customer service to retain the customers they have and create that vitally important word of mouth advertising. My specialty area of motels is no exception to this rule. A motel which provides a great customer experience, is interested in and tries to solve a guests problem will always succeed over a motel which simply provides a facility and has a take it or leave it attitude. If you operate a large motel it is also vital that your staff know what your customer service ethics are and deliver the same experience for your guests. The biggest thing with customers is to remember they are people who want to feel cared for and wanted.
September 09 2008 | Articles for current moteliers and Entering the Motel Industry | 7 Comments »
Do most managers lease or own the motel?
Do they hire managers or manage it themselves?
Is it more of a lifestyle or a big business investment?
These were some questions posed after one of my recent articles and so I thought they would be a great topic to follow on with. As most of you who have stayed in motels will know they can all be very very different. This is reflected in both the experience you get from staying in a particular motel, and also the experience for someone owning that motel.
Most motels are run under a lease situation. Without doing any specific research an educated guess would put the figure of lease motels at about 90 – 95% of all motels. This means that about 95% of motels have one entity owning and operating the business and they in turn lease the land & buildings from a different entity. On some occasions this can be the same person using two entities for tax purposes and on other occasions the two entities are completely separate people.
The decision as to buying a motel business only ( usually referred to as “the lease”) or a freehold going concern which includes the business, land and buildings is often governed by the amount of money available to invest. The return on investment for a business (lease) ranges from approx 20 -25% , a freehold going concern return on investment is around the 10% figure. Please bear in mind that these are rule of thumb figures and can not be applied rigidly to all motels as there are many other contributing factors in each motel.
If we take a scenario where someone has $1 000 000.00 to invest they may expect to achieve a $100 000.00 return on a freehold going concern or a $250 000.00 return on a lease. This would in turn dictate the type of lifestyle they could achieve in the motel. The freehold going concern may be an older 9 unit motel whereby the owner was required to do much of the physical cleaning themselves. Alternatively the lease may be a newer complex with more units and thus the owner is required to be in a more managerial type position with staff available to undertake the physical work. The lifestyle choice comes down to what the purchaser is most comfortable with
It is not just a difference between a freehold going concern and a lease which will give a different lifestyle but also within the different types of motels. A lease priced at $350 000 may have a $70 000 cash surplus ( earnings less expenses but prior to interest, tax depreciation and drawings). This would probably necessitate you having to do some physical cleaning and is sometimes described by non-motel people as buying yourself a job. It is very important to remember with motels however that as an owner there are practically no living expenses. Accommodation, phone, vehicles, power and insurance amongst other things are paid for by the business and a tax adjustment made at the end of the year. If employed elsewhere a person would need to earn the amount of these costs plus a third again for tax to get the same benefit. With living costs already taken out it can be argued that the cash surplus is a return on your total investment with no need to adjust for owners salaries as in most other businesses.
As we get to the more expensive lease operations the returns are percentage wise the same but dollar wise obviously more. Someone investing in a larger lease showing a return of $250 000 would expect a return of approx 25%. This would give them a business where they would do less of the hands on work and more management and promotion of the business. Once again all the living expenses are included in the business. If someone purchased this and employed a manager they could still probably expect after deducting a managers salary a return of about 18%. As we are seeing more of the larger more profitable motels within the industry the practice of having a lease business run under management has become more prevalent.
As you can see from all this motels can be both a lifestyle and a big business or a combination of both. There are many different and unique factors in each motel so the purchaser must be aware of these differences and ensure they choose a complex which will meet their needs. It is essential therefore to use the services of an experienced motel broker who understands motels, how they operate, the differences between them and how this all relates to the purchaser. Being empowered to make an informed decision at this stage can prevent a lot of distress after the purchase is complete.
September 01 2008 | Changes in Motel Trends and Entering the Motel Industry | 4 Comments »