Motel Leasing

Posted By Andrew Morgan

There are many reasons why leasehold motel tenure has been such a successful business option for thousands of everyday people for the past 35 years or more. Although around well beforehand, this business model gained much popularity and interest from those already within the industry and then newcomers who could see all the benefits on offer. These benefits have continued to be attractive to first time motel owners in addition to those experienced owners and/or operators who continue to expand their motel investment portfolios by acquiring additional motels under lease whilst overseeing the businesses under management.

Change is a constant and the motel industry is no different. How things are done within the industry and how markets change are just two areas that are an everchanging dynamic. Improving documentation to ensure smoother business operations or making amendments to avoid any foreseeable issues that may arise is one way. The changing of the market is largely controlled by external economic and other forces with those in the market often only able to react within the parameters they can.

Benefits of a leasehold motel business that satisfy the buying motives (financial, lifestyle and security) of potential investors and operators are not limited to the following:

Lifestyle

Residence Onsite – Offers a home to live on site for the family, allowing more family time together whilst operating a business. Children can also get involved and start learning the business and how to interact with guests from a young age.
Downtime – Motels are generally busy until late morning and again from late afternoon. The time during the middle of the day offers some downtime for the operator.
Building Customer Relationships – For those who enjoy building customer relationships motels can offer a lot of repeat clientele if the guest is looked after. There is a lot of satisfaction gained when a customer keeps coming back regularly because they are happy with the service being provided.
Operated Under Management – Motels are comfortably managed by a couple, so if an owner decides they would like to step back from the business for a while there are many good managers available who can operate a motel day to day.

Financial

Lower Capital Outlay – A motel lease does not require one to buy the land and buildings of the motel. This is the larger value component of a motel and buying the property therefore increases the capital outlay considerably and reduces the risk and return.
Financing – The lower capital outlay means the loan required to buy will be substantially lower. This means lower levels of loan repayments and less sleepless nights for those who are not comfortable borrowing millions of dollars to buy a freehold motel. Banks are historically very comfortable lending for motel acquisitions as they are seen as solid and secure businesses.
High Returns on Investment – The returns on investment for motel leases are strong and in the main range anywhere upwards of 30% depending on certain factors such as location, length of the lease, level of rent, economic strength of the region, standard of the property, strength of the business, etc.
Quality Presentation – If a budget to buy a motel is one million dollars, the opportunity exists to buy a much higher quality motel under lease than a freehold motel at the same price level, simply because the land and buildings are not included.
Strong Cash Flow – Upon commencing operating a motel there is an income from day one depending on the level of occupancy. An operator will achieve a certain level of cash flow immediately as most guests pay by credit card prior to their stay.
Limited Stock on Hand – Motels carry very low amounts of stock. Motels with restaurants will carry more stock than those without depending on the size of the food and beverage operation.
Ready Market – When the time comes to sell there is always a competitive market to acquire motel leases. A good quality motel if priced to the market, will always demand attention.
Taxation – This is dependent on numerous factors such as how the ownership structure is setup. The benefits of living out of the business includes whatever costs one incurs living in their stand alone home such as insurance, electricity, food, beverages, telephone/internet, rent/loan repayments, motor vehicle costs, etc.

Security

Commercial Terms – Leases are predominantly set up on mutually beneficial commercial terms to the Lessee and Lessor and therefore work very well. When setting up a lease, the intention is to make it work over the long term.
Asset Ownership – Includes the title to all the plant and equipment in the motel and the remaining tangible and intangible assets such as agreements in place, business name, customer contacts and goodwill.
Long Term Leases – Leases generally commence as a 25 or 30 year term inclusive of option periods. This is a very long lease tenure offering the lessee long term security to operate the business. The ability to extend leases as the term of the leases diminishes is more often than not available to both Lessee and Lessor.