A roadside hotel designed primarily for motorists, typically having the rooms arranged in low blocks with parking directly outside.

Motel Vacancy
Ian Crooks

Back in 1985...

...the concept of motel leasing was pioneered in Australia by Ian Crooks, Managing Director of Resort Brokers Australia. Previously, all motels had been owned and operated by the same party.

Fast forward to today and over 80% of all Australian motels are 'split'. This describes the situation where one party owns a long term lease, lives on site and operates the business, while another party owns the land and buildings and receives an annual rent.

The concept revolutionised the motel industry, opening it up to a wider spectrum of buyer (both lessee and landlord) and making it more financially accessible in the market place.

Freehold going concerns

Freehold Going Concerns. This describes the situation where one party is both the owner and the operator of a motel. They are responsible for all aspects of the motel, from bookings to refurbishment of chattels. No rent is payable and the owner receives all profit after operating costs.

Prior to 1985, all motels were operated in this manner. Today, fewer than 20% of Australia's motels are Freehold Going Concerns.

The Split

Lease. Most new motel leases in the industry are 30 years long. This is made up of a fixed term plus options (i.e. 10 years + 4 x 5 year options). The lessee often lives on site and conducts the day to day management of the business.

The lessee is free to run the property as they see fit. Their objective is to grow occupancy and tariffs, increasing the net profit. They are responsible for all operating costs, such as wages, land tax and utilities. The lessee pays the landlord an annual rent for usage of the land and buildings.

The lease value is made up of two components; the ‘goodwill’ of the business and the chattels. Although the specifics of every lease document varies, the general rule of thumb is that chattels are defined as everything that can be physically removed from the property.

Passive Investment. The owner of a passive investment is also known as the ‘landlord’. They own the land and buildings that make up the motel, but they have nothing to do with the operation of the business.

The landlord is responsible for all structural repairs and is expected to maintain the standard of the property for the duration of the lease.

The landlord/passive investor receives an annual rent from the lessee. Depending on the lease documents, this rental figure increases yearly by CPI. In some cases a rent review clause is inserted.

Motels in any formation are considered very strong businesses.

Banks are happy to lend on all types of motels including both freehold and leasehold.

Depending on location, leasehold motels will show between 30-32% return on the net profit after add backs. The more regional the property, or the shorter the remaining lease term, the higher this return needs will be. Banks lend up to 50% of the value of the lease, depending on a buyer’s individual situation.

Freehold passive investments are always in high demand, as they are considered to be very secure. This is due to the fact that the ‘goodwill’ of the business remains with the property.

Unlike other commercial investments where a tenant typically pays a bond as security, with motels the lessee will have outlayed a large sum to purchase the lease. As such the lessee has a vested interested in the property.

Although freehold investments are sold at a fairly standard capitalisation ratio, the return will vary slightly depending on the location and age of the property. Traditionally banks will lend between 65- 70% of the value of the investment.

Freehold going concerns are much rarer in the market place as most have already been ‘split’. They remain popular with individuals who do not want the obligation of paying rent and want to have total control over every aspect of the business and property. Traditionally, banks will lend 70% of the freehold value depending a buyer’s individual situation.

Being a good motelier

The key to being a good motelier is to really enjoy working with people. The objective is to build relationships with your guests in order to build your repeat clientele.

There is no need to be experienced in accommodation or tourism industries to be a good motelier. Some of the best moteliers we have seen over the years have come from entirely different backgrounds.

Experience as a handyman means you can save money and keep the property presented in tip top condition. Being good with figures and accounting will help you keep track of your costs and ensure you have a salable entity when the time comes. Also having an interest in marketing will help keep your motel in the limelight.

However, more important than anything else when it comes to running a successful motel is having a friendly face behind reception and offering a personalised and professional service.

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