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Key Considerations when Purchasing an Accommodation Business
Structural change to the accommodation sector of the tourism industry over the past 20 years has opened up business and investment opportunities across a range of accommodation types, operating arrangements and price levels.
The Accommodation Sector includes;
• Hotels and Resorts
• Serviced Apartments
• Holiday Apartments
• B&B’s, Guesthouses & Farm stays
• Caravan Parks
This article will focus specifically on motels and buyer considerations.
There are three purchase options available for motel investors. These are:
1. Leasehold – purchase the business component of the motel, including the business operations, the lease, goodwill, stock and chattels of the motel.
2. Freehold - not only are you purchasing the business, but also the real estate attached to the motel.
3. Investment – in this situation you are purchasing the freehold motel property with an incumbent lease attached to it.
More often the option you choose comes down to your financial resources. Although, we are seeing more strategic leasehold buying in preference to freehold investments. Irrespective, it is critical to assess the quality of the physical assets included in the sale and the financial performance of the business.
Examine the Motel's Assets
Few new motel properties have been developed over the past 20 years, so expect to buy a well-established business. Determine when important capital expenditure has been undertaken and what future capex will be required. This can be broken down into two categories –
• Room/Motel Refurbishment
• Soft Furnishing Replacement.
Room/motel refurbishment is generally needed every 10 years to maintain market relevance and soft furnishing needs replacing every 5-7 years. Because the core product is a motel room, it is important that they meet the expectations of the target market. Maintaining a comfortable, contemporary motel room requires ongoing capital upgrades. It is therefore paramount that prospective buyers closely examine the existing standard of all F,F&E and determine the timing and value of any future capex. Particular attention should be paid to bathrooms, which are expensive to renovate.
Also review the property infrastructure, as it plays a key role in supporting guest satisfaction. Infrastructure includes, but not limited to; hot water supply, water pressure, air-conditioning, heating, swimming pools (filters, pumps and heating), driveways/carparks, kitchen equipment, computers and reservation systems.
Location is a key driver of a motel’s success. When reviewing a motel, buyers need to identify how the location generates demand and is it sustainable. In addition, does the motel have street appeal to capture passing trade?
The private residence must meet the buyer’s needs. You don’t want to be spending money where there is no potential return.
Just like any business purchase, prospective buyers need to understand the financial performance of the business. Getting access to the last 3 years’ profit and loss statements, BAS returns, past and future occupancy information is expected.
Review the motel’s performance against industry trends and measures. These are accessible through the ABS. Key measures of motel performance include average room rates, occupancy percentages and RevPar (revenue per available room). This information can also be used to compare against competing motels, and other motels for sale.
A leasehold purchase is generally a cheaper option within a particular geographical market because only the business component of the motel is being purchased.
Leasehold Motel Purchase Considerations
Leasing can be an affordable and smart option for new motel owners. Leasehold motel owners can expect to obtain yields of around 29% on their investment which equates to a profit multiple of 3 to 4 times. Multiples will be influenced by the lease terms and attractiveness of the business.
Leasehold motels can achieve average profit margins of around 32-35% of revenue before replacement. Ideally, owners should establish a reserve for capex replacement of around 3-4% of gross revenue.
Because buyers are purchasing the rights to operate a lease they need to consider the terms of the lease and the impact these may have on motel operations.
The critical elements of any lease are the lease term and the annual lease payment. Buyers should be looking for motels with healthy lease periods in excess of 20 years. Annual lease charges are usually around 10% of revenue. Pay close attention to the method of calculating annual increases. These are generally aligned to CPI changes.
Be clear about the lease obligations and engage a solicitor who is experienced in dealing with motel lease agreements.
Freehold Motel Purchase Considerations
Freehold motel purchases require the buyer to examine key business issues and the real estate component. Therefore, standard property and legal inquiry needs to be undertaken. Once again, ensure legal advisers are experienced in this area. Particular attention needs to be paid to such things as:
• Local environmental planning restrictions and zoning. Be cognisant of any potential changes that can have a negative impact on land use and development;
• Obtain details of ownership title and land valuations;
• Have land surveys and building inspections completed;
• Check with the local council to ensure the building complies and there are no outstanding issues.
Yields on freehold motels can vary widely due to the property component of the business. On average, a motel buyer can expect to obtain yields of around 12%, which equates to a profit multiple of 8 times earnings.
Freehold motels achieve average net profit margins of around 43% before replacement. Owners should establish a reserve for replacement of around 4-5% of gross revenue. The reserve is higher for freehold motel operators due to structural maintenance and capex associated with real property ownership that is not passed on in a leasehold situation.