Forums / Property Investing / Commercial Property / Motel First Time Prospecting Buying & Operating Lease or Freehold Questions

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  • Profile photo of rechargeliferechargelife
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    @rechargelife
    Join Date: 2011
    Post Count: 2

    <p class=”MsoNormal”><font size=”2″>My wife & l are searching for motel accommodation to operate and live in. This will be our first time in the motel industry but have stayed in many variety of accommodation over the last 20 years or so from a customer point of view. l hope that helps us leverage upon to offer a greater service to a changing market with a new generation of families now using motel as their form of accommodation of choice.

    As we are new to this industry from the business side of operating a motel we have a number of questions while we are in search for that first motel that suits us. Please see below and if you can share your advice on any. It would be very much appreciated:-

    1. We’re currently looking at 2 prospective motels to choose from, one is a freehold and the other is leasehold. They are in different locations the leasehold is in Tocumwal, NSW & the freehold is in Barooga both are through the same real estate agent for sale but the real estate agent said we would find it difficult to get a loan for a leasehold motel but would be ok with freehold. What are your thoughts? l have read number of different websites saying banks are now open to lenders for leasehold and some instance will see them the same as freehold. What do you think of this in 2011 onwards?

    2. Both the freehold and leasehold are currently linked with chain motels, if we went for the leasehold would we be required in the terms of lease to stay with that particular motel chain? Or are you allowed to change to another motel chain that suits the new leaseholders? Is it worth the yearly fee to be in alliance with a motel chain? Or now with the invention of the internet and social popular networking sites to go it privately without the yearly expense of motel chain fee?

    For us the reason to enter the accommodation motel industry is to be a part of it, the business lifestyle & income prospective, meeting new people regularly and infusing the digital age knowledge through the Internet. We hope to make their holiday or tour experience a little more unforgettable or as a word of mouth experience and pleasure to serve in the tourism accommodation industry.

    Look forward to all your feedback very much appreciated as we start our journey in to the wonderful accommodation industry and hopefully give back through.</font>

    Profile photo of michaelandre70michaelandre70
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    @michaelandre70
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    All the best with the venture…

    Profile photo of rechargeliferechargelife
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    @rechargelife
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    Profile photo of thecrestthecrest
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    Hi Rechargelife
    It's a long path from where you are now to the front door of a motel of your own.
    But it can be done.
    I suggest you read all the posts on this forum about motels, talk to the Chains and ask them about the benefits of membership vs fees. You usually don't inherit previous owners' chain agreements, usually free to make your own decisions. Chains are popular and usually helpful for  newcomers.   
    I've sent you a message on FB.
    Borrowing criteria for motels is complicated, there are good finance brokers on this site, suggest you talk to them. Choose the ones with lots of posts to their credit, they've been here helping forum members for a long time.
    Start analysing P & Ls from those 2 motels and any others of interest until you understand them. You need an accountant to help you.
    Keep learning until you have enough knowledge that buying is a well informed decision. 
    Cheers
    thecrest 

    thecrest | Tony Neale - Statewide Motel Brokers
    http://www.statewidemotelbrokers.com.au
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    selling motels in NSW

    Profile photo of Mick CMick C
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    @shape
    Join Date: 2010
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    rechargelife wrote:

    My wife & l are searching for motel accommodation to operate and live in. This will be our first time in the motel industry but have stayed in many variety of accommodation over the last 20 years or so from a customer point of view. l hope that helps us leverage upon to offer a greater service to a changing market with a new generation of families now using motel as their form of accommodation of choice.

    As we are new to this industry from the business side of operating a motel we have a number of questions while we are in search for that first motel that suits us. Please see below and if you can share your advice on any. It would be very much appreciated:-

    1. We’re currently looking at 2 prospective motels to choose from, one is a freehold and the other is leasehold. They are in different locations the leasehold is in Tocumwal, NSW & the freehold is in Barooga both are through the same real estate agent for sale but the real estate agent said we would find it difficult to get a loan for a leasehold motel but would be ok with freehold. What are your thoughts? l have read number of different websites saying banks are now open to lenders for leasehold and some instance will see them the same as freehold. What do you think of this in 2011 onwards?

    2. Both the freehold and leasehold are currently linked with chain motels, if we went for the leasehold would we be required in the terms of lease to stay with that particular motel chain? Or are you allowed to change to another motel chain that suits the new leaseholders? Is it worth the yearly fee to be in alliance with a motel chain? Or now with the invention of the internet and social popular networking sites to go it privately without the yearly expense of motel chain fee?

    For us the reason to enter the accommodation motel industry is to be a part of it, the business lifestyle & income prospective, meeting new people regularly and infusing the digital age knowledge through the Internet. We hope to make their holiday or tour experience a little more unforgettable or as a word of mouth experience and pleasure to serve in the tourism accommodation industry.

    Look forward to all your feedback very much appreciated as we start our journey in to the wonderful accommodation industry and hopefully give back through.

    Hi rechargelife,

    I can answer question 1-

    From where i stand, leasehold and freehold never changed in the last 3-4 years ( agent’s info might be out of date) but Yes; smaller lenders will consider leasehold and freehold to be the same. HOWEVER it wont be the same LVR, and on slightly different terms. But all in all it’s the same rate and serviceability.

    Regards
    Michael

    Mick C | Shape Home Loans
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    Profile photo of thecrestthecrest
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    Hi Rechargelife
    What was the outcome, any progress in your project ?
    Cheers
    thecrest

    thecrest | Tony Neale - Statewide Motel Brokers
    http://www.statewidemotelbrokers.com.au
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    selling motels in NSW

    Profile photo of rivianariviana
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    @riviana
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    Hi thecrest,

    Judging from your previous posts, you're the "go-to" guy about motel investment questions.  My wife and I are considering going into business and we've been comparing motel leaseholds to other businesses.  My parents have been successful motel lessees and also motel developers so we've also been gleaning info from them about the industry.
    There seems to be lots of motel leaseholds on the market at the moment and the returns that can be achieved from operating a lease seem to be fairly high.  Would you agree with this assessment?
    For example, there is a 22 unit leasehold for sale in a large regional city in Victoria, asking price is $900K for 22 years.  The motel is bed and breakfast only (which would suit us, we're not interested in doing evening restaurant meals), net profit after rent and other outgoings is approx $240K (after add-backs, profit is approx $290K), on turnover of $525K.  The rooms have been recently refurbished, there is a restaurant over the road and another restaurant being built not far away.
    Do these figures look reasonably believeable to you?  How rubbery are the add-backs?  Is 22 years long enough for a lease or should it be longer to make it easier to sell down the track?  My parents are of the opinion that 25 or 30 year leases are more desirable nowadays.
    Also, I'm wondering what kind of business strutcure is most appropriate for motel leaseholds?  I've been looking into partnerships, companies and trusts, but it seems quite complicated.  I realise this is more of an accountant/legal question and that the structure will depend on our personal circumstances, but any advice would be helpful!  Thanks
    How are you progressing with your purchase?   You're right about Xmas slowing everything down.  Nothing much happens for most of January too, from what I can tell.  Not just with property, pretty much everything shuts down, everyone's on holidays.

    Profile photo of thecrestthecrest
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    Hi Riviana
    You're blessed having parents in the business because you know their info is accurate. Vendors info requires due diligence.
    Add backs are sometimes a contentious issue and opinion varies on the validity of some categories of addbacks, so when you say the motel netts an extra $50K after addbacks, you would no doubt be looking very carefully to see if the motel would operate under your management in that manner and without those expenses. The true nett under your management depends entirely on how you would operate the motel, so remember to spreadsheet the motel scenario under your management and see what it earns, then you'll know what it's worth to you. Tell me the addbacks and $ and I can venture an opinion if you like.
    The figures you have mentioned can be checked by your accountant, and also utilities costs can be checked by getting a history dump from the gas & elec & water suppliers. Same with any suppliers, with the vendor's approval naturally.
    Monthly costs of utilities, labour costs, wotif commission and chain costs, occupancy and sales should follow each other very closely across an annual graph to help to verify income claims.
    Large regional Vic city / town, good choice, remembering you will do best with a place which is a "destination" town as well as a "through" town, not just one or the other, so don't buy where a town bypass is imminent until about 3 years after, when the damage has passed and the figures have recovered to an assessable level.
    Motel B & B (no restaurant) near 2 restaurants, ideal. Restaurants in motels are usually poor performers, extra 40 hrs per week work, useful for selling rooms of course but the same can be done by actively selling the proximity of one or several restaurants nearby in the same way, but without the hassle of staffing, funding and operating them. But your continued good fortune depends on ensuring the restaurant continues to operate, so pump your people through it. 

    Recently refurbished ? – Excellent, someone else has done the work for you and their sales graph should show the time frame when it was done by showing a slump while the rooms were off line being refurbished. Also gives some extra depreciation.
    Lease period. The industry's opinion is it's easier to sell a motel leasehold with 25-30 years on the lease than 22.  Your parents are right. So it would help if the vendor could confirm in writing the landlord's agreement to alter the lease accordingly and at what cost, payable when, but better as an option that you can action later, or pay annually or when you sell, so you have the benefit of the funds in the meantime, and can sell with 24 or 25 years on it. You need to consider your exit strategy before entry.
    Business structure – see your accountant, too many personal situation type variables. Ensure that your financier will lend to the same extent to whatever structure you favour. Some financiers deals vary with the structure. Also please note, there are
    Finance Brokers on this website with thousands of postings to their credit who have been helping people and this forum for years and can assist with finance and structure information.

    Long winded, sorry, but the points you asked are very important and you're obviously tracking very well.
    If you want to send (email through PM page on this site) me some nameless but detailed info on the motel you're welcome. I bet my opinion won't vary from your parents opinion, the figures will tell them the same story because they're in the business and they'll know.

    Let me know if I can be of more assistance.
    Cheers
    thecrest

    thecrest | Tony Neale - Statewide Motel Brokers
    http://www.statewidemotelbrokers.com.au
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    selling motels in NSW

    Profile photo of rivianariviana
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    @riviana
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    Thanks thecrest,

    We haven't asked for detailed figures, we're not really at the stage of being about to get serious about making offers yet; we're just doing some background/preparation work.  I figure it'll be the end of the year before we can get serious, but hey, you can never start learning too early, right?
    I can tell you the figures the from a leasehold for sale in Ballarat, I figure Ballarat would get a few tourists with Sovereign Hill, there's a uni there, the VFL footy team and it's a big regional city so it should get plenty of reps.

    Thanks for your input,

    Regards,

    Riviana

    Profile photo of thecrestthecrest
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    Hi Riviana

    Looking at figures and leases on a few reasonably comparable properties will give you the experience you need when the right one comes along.
     
    It also helps you fine tune your search criteria, and keep up with changing market conditions.
     
    You can discuss your chosen scenario with your financier to obtain "pre-approval" if you purchase within agreed guidlines. 

    The best motels don't last long on the market and when doing due diligence on those, expertise = speed = no gazump. 

    There is no such thing as doing too much homework when choosing the location of the motel. 

    Let us know your progress, and if you need any assistance.

    Cheers
    thecrest

    thecrest | Tony Neale - Statewide Motel Brokers
    http://www.statewidemotelbrokers.com.au
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    selling motels in NSW

    Profile photo of howie05howie05
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    hi recharge life . I have just sold my business(cafe ) in Tocumwal and am looking for a motel leasehold .
    From my point of view I wont be looking in Tocumwal or Barooga as the sheer volume of competition from other motels I feel is to much.
    In Tocumwal  itself there is 13 Motels and Caravan parks ( population 2000) . The main newell highway only passes 1 of those motels!
     The rest of the motels are located in obscure spots and not that easy to find let alone stumble upon.
         Barooga is much the same only this town doesnt have a main road going through it that leads anyone anywhere. As with Tocumwal it has way to many motels and other accomodation in competition. There has been a large drop in tourist numbers over the past 7 to 8 years and I dont see that improving anytime soon .
        Lots of tourists used to come here for the river and golf etc. Now it has rained there is lots of alternatives now that most of the lakes have water in them . Most of the motels etc.  where built in these towns when Victoria didn`t have pokies so there was busloads daily of people coming up here.This has long since dried up . As I`m looking at motels I take an interest to see how many cars there are in the motels as i drive around Tocumwal and Barooga . I wonder how they survive . Even on weekends they dont look to be very busy other than in the times I mention below. Besides there is only the 1 sporting club in Barooga doing okay here now and the other one up the road I think they are about to buy to keep it afloat.
       The busy season is really only about 4 weeks at xmas and then easter and maybe a couple of long weekends here and there, and these really depend on the weather conditions.
        I would be looking further up the newell highway where the travellers will be staying overnight before moving on, with todays travelling public they tend to stop in Tocumwal for a quick feed then travel further north or south before stopping for the night.
     These smaller towns such as Jerilderie, Narrandera,west Wyalong etc. will have less competition from other motels.
       Well these are  just my thoughts on the area you are looking at from a business perspective so I hope I have given you some things to think about, if you havent bought just yet
     cheers howie

    Profile photo of thecrestthecrest
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    When considering location, think of towns that are not only a "through"  town, but a "destination" town as well. That means guests stay longer, and you get those passing through as well. Wagga, Cootamundra, Young, Cowra, Parkes, Orange, all strong  motel towns.
    Life is tough enough, why buy in a marginal area, struggle for years, and then wonder why there are no buyers when you want to exit ?
    A great position in a weak town is not a great position.
    Buy in strong "sponge" towns, not the weaker ones being drained by stronger ones nearby. (google town growth stats by Bernard Salt of KPMG).
    Choose carefully.
    Cheers
    thecrest

    thecrest | Tony Neale - Statewide Motel Brokers
    http://www.statewidemotelbrokers.com.au
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    selling motels in NSW

    Profile photo of kindrenkindren
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    @kindren
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    Hi thecrest,
    I would value your opinion on motels in Coffs Harbour, pacific hwy location. Should have a mix of "through traffic" and "destination traffic" also a large town 60,000+ people, so possibilities of corporate trade…
    Thankyou

    Profile photo of thecrestthecrest
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    Hi Kindren
    Welcome to the Forum.
    The type of motel is very important in giving an opinion on "motels in Coffs Harbour".
    Are you seeking a motel ?
    If so, then if you clearly explain what style of motel you're seeking
     I can be more specific with Coffs, because it all matters.
    Include your preferences with
     price bracket,
    stars,
    age & condition,
     leasehold or freehold,
     restaurant or B&B, 
    number of rooms,
    chain or not, 
    any other preferences. 
    Cheers
    thecrest

    thecrest | Tony Neale - Statewide Motel Brokers
    http://www.statewidemotelbrokers.com.au
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    selling motels in NSW

    Profile photo of kindrenkindren
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    @kindren
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    Hi, thankyou for the welcome.
    currently interested in a listing
    Rough details are
    Motel leasehold,
    restaurant
    Chain
    built in early 80's
    40+ rooms
    $1.3-$1.7 T/O
    On the pacific HWY.
    We are looking at others also, not in Coffs
    Any advise appreciated
    Cheers

    Profile photo of thecrestthecrest
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    Hi Kindren
    Coffs.
    Positives.
    Strong motel town,
    Plenty of through and destination traffic.
    It's one of the few places where the Pac Hwy goes through a town on the water, rather than having to leave the hwy and travel 7-10 kms to reach the town. Makes a difference.
    No bypass.
    Strong town infrastructure, beach, marina, CBD, strong local economy.
    High tourist activity.
    Decreasing travelling time from Sydney or Brisbane.
    Road improving.
    Some tired competitors in need of refurb.
    Negatives.
    Excessive discounting by some (priceboards)e.g. group between Toreador and hwy lights.
    Competitive.
    Some motels flooded (e.g. ground floor Bentley in town opposite RSL, Council reckons nearby stormwater creek thru park now cleared).
    Periodic refurbishment essential.
    Some seasonality in sales.

    BTW. Country Comfort should do better, don't know why it isnt, check traffic noise, net mktg or refurb situation.
    Hope that helps, all only an opinion, usual disclaimers apply, exhaustive homework DD is your best friend.

    Here to help if you need it or want to discuss specifics, PM me / email.
    Cheers
    thecrest

    thecrest | Tony Neale - Statewide Motel Brokers
    http://www.statewidemotelbrokers.com.au
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    selling motels in NSW

    Profile photo of kindrenkindren
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    @kindren
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    Thankyou therest, you are most informative.
    Is there a basic 'rule of thumb' loosly used for projected capital growth for a freehold and also for a  leasehold?
    eg with residential property we hear 7-10 year doubeling effeft, is there a guide for motels? I would think it largly dependant on the way it is managed, but having read a lot of your posts you might have a scenario in mind…

    Cheers

    Profile photo of thecrestthecrest
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    I suggest you ask those who professionally value motels that excellent question.

    Hopefully their method of valuation should not differ too much from yours as a buyer.
    e.g. leasehold – period remaining, lessee's lease conditions, nett profit, condition of goods n chattels, current and future security of business.
    freehold – land value, nett profit, condition of building and other improvements, condition of goods n chattels, current and future security of business.

    Land values change according to local market conditions.

    Cheers
    thecrest

    thecrest | Tony Neale - Statewide Motel Brokers
    http://www.statewidemotelbrokers.com.au
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    selling motels in NSW

    Profile photo of thecrestthecrest
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    Hi Kindren
    Just an update for you.
    Last week we received a valuation on a leasehold property.
    The valuer considered everything about the building condition, future expenses, business turnover, nett, security of business, rent, lease length & terms, rent, tariffs, competition situation. He finally found all those conditions were positive, and therefore valued it highly, using a cap rate of 25%, meaning the value figure is nett x 4, or the nett profit is 25% of the value figure. This is only possible where there are no negatives in any areas examined.
    If there were negatives, for instance, the motel required some repairs due to ageing, or it was highly seasonal, bypass pending, stiff competition, town or location not strong, up goes the risk factor and the valuer would most likely move the cap rate figure (capitalisation) upwards from 25% to somewhere near 30%.
    For example, if nett is $200K, then valuation by different cap rates as follows : 25%=$800K, 27%=$740K, 30%=$666K.

    Obviously as buyers, we prefer to apply cap rates around 30% to buy cheaper, but a top quality motel commands 25% cap rate because it’s like a blue chip investment.

    Capital gain can come from a few areas with leasehold, but the main ones are nett, then security of income, which relates to how strong the business is and how secure it’s position is in the market, then lease length and quality of terms n conditions, rent level, condition of premises. Obviously all those factors relate to as assessment of how much the business netts and is likely to continue to nett, and how strong and secure that income is now and later on.
    Valuation quotes were between $2,500 and $5K.

    How is the search going ? Hope you’re finding it easier and less confusing.

    Cheers
    thecrest

    thecrest | Tony Neale - Statewide Motel Brokers
    http://www.statewidemotelbrokers.com.au
    Email Me | Phone Me

    selling motels in NSW

    Profile photo of thecrestthecrest
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    @thecrest
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    Hi All
    Have any of the posters here got an update of their progress in this area of investment ?
    Info shared is a blessing for all concerned and part of our education process,
    always appreciated.
    Cheers
    thecrest

    thecrest | Tony Neale - Statewide Motel Brokers
    http://www.statewidemotelbrokers.com.au
    Email Me | Phone Me

    selling motels in NSW

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