Motels

Motel Lease for Sale: What is it and how does it work?

For those of us who have been in the Motel Industry for a long time the answer to the above question seems obvious but we forget the day when we first entered the industry and asked the very same question.

There are three ways of entering the industry. Buying a Freehold Going Concern motel ( land Buildings and business), buying an Investment Motel (land & Buildings only) or buying a lease motel (business only). The lease business is the most common way of entering the industry with approx 90 to 95% of motels run under a lease situation.
In the lease situation a purchaser buys the right to operate the motel business from the premises for the number of years determined by the lease, the goodwill of the business and the chattels.

The lease is the document which dictates the terms and conditions within which the purchaser must operate the business. There is no standard motel lease and they can be quite varied so it is essential when purchasing a motel that the purchaser has a solicitor familiar with the motel industry review the lease and advise them on the various terms. The lease will specify the obligations of both the lessor (landlord) and lessee(purchaser). Once the lease is set up the terms are valid and can only be changed by mutual consent of both parties. The terms of a lease are usually relevant to the use of the land & Buildings and not specific to the way in which the business is operated. For example the lease may stipulate the building must be painted every 10 years but would not stipulate where the business was to advertise.

If the lease is purchased from an incumbent lessee then the purchaser is assigned the lease with the current terms and conditions and therefore becomes bound by those terms. The length of the lease is an important factor as this provides for you to operate the motel in the premises for that length of time. It is usual for a purchaser to want a lease with at least 20 years still to run. If the lease is shorter than 20 years the lessor may extend the term and it is usual for this to attract a cost.

The goodwill of a motel lease business includes the client base and business procedures which the current owner has developed. If a purchaser was buying a new motel with no previous history they would need to develop a customer base and would only gradually build the occupancy and turnover. By purchasing an established business this has already been developed and means the incoming lessee can expect a general level of income right from day one. This goodwill may also include branding, logos, websites etc. and the database of customers for the motel.

The chattels are a tangible asset; they usually consist of all the furniture within the motel, the carpets, curtains, appliances, fridges, stoves etc. If anything is hired this should be disclosed within the information provided to purchasers enquiring about the motel. A chattels list will be provided with the motel information or as part of the due diligence process at the latest and these items become the property of the purchaser.

Thus when buying a motel lease a purchaser is bound by the terms of the lease but has the ability to operate the actual business in a manner which they wish to. The financial decisions, the choice of chattels & soft furnishings, the marketing decisions and the operational decisions such as staffing are all undertaken by the lessee without needing the input of the landlord.

If you have any specific questions relating to motels or leases please feel free to comment or contact me directly and I will endeavour to answer them for you.

October 18 2010 | Uncategorized | 10 Comments »

Entering the Motel Industry

Motels currently available, without being specific, range from small leased motels at $300,000 to large freehold complexes in the $millions. Within these motels the complexes range from highly organized operations to small lifestyle coastal motels. It is therefore important to establish the type of complex that would meet your requirements and suit your individual needs.

In general terms there are two ways of entering the industry, either you purchase the freehold land and buildings together with the business of the motel or you just purchase the “business” of the motel while renting the land and buildings, this is known as a “Lease”. Generally the decision as to which way you go is determined by the amount of capital you wish to invest and the type of lifestyle you are looking for EG: a “way of life motel” (say coastal relaxed low return for capital invested) or a “business motel” with a good bottom line.

It is often difficult for people first looking at purchasing a motel to come to terms with investing a large amount of money in a lease which does not contain any “bricks and mortar” as such. It is important to realize that when you purchase a lease you are buying all the chattels, i.e.: beds, furniture, carpets, drapes, crockery, cutlery, office equipment etc., almost everything except the land, bricks and mortar and roof. Also you are purchasing the right to operate that motel business in that building for the number of years on the lease. As long as you abide by the terms of the lease no-one can take that right away from you. Obviously then when buying a lease the length of the lease is an important factor.

With the purchase of a freehold going concern you are buying all of the above but also including the land and buildings. This is another way of entering the industry but as the returns on your investment are lower you would need to invest in a more expensive freehold than a less expensive lease to give you the same returns whilst operating the motel.

Under ideal conditions the cost of operating a motel will equate to 33% to 40% of the true turnover of the business (depending on the efficiency of the operator, items hired or owned and turnover mix). If it is a leased motel the ideal rental will be 28 to 33 % of the true turnover, leaving the balance of turnover to service any debt and provide an income for the operator. Please do not apply this formula rigidly as each operation must be looked at as a business on its own taking location, local environment, length of lease and history into consideration.

The Motel Association of N.Z. have compiled a book which may be of further interest to you. This book “An Introduction to Purchasing or Leasing a Motel”. can be purchased by writing to the Motel Association of New Zealand, P O Box 27 245, Wellington or visit their website www.manz.co.nz.

August 21 2008 | Changes in Motel Trends and Entering the Motel Industry | 5 Comments »