Motel Leases – Rents Out of Line
Further to my previous article in the last issue of Resort News entitled Motel leases – market rental determination, the level of rent paid by many motel lessee’s is obviously an issue that is close to many motel operators.
The question put to me by a number of moteliers is “what can be done about our high rent that we pay”?
This is a difficult question to answer, however it is highly unlikely that a lessor will reduce the rental income received on their investment property whilst an enforceable lease is in place. If this is the case one must look to rectify the situation in other ways.
First, setting the rent correctly when the lease commences is paramount. If the rent is set too high from the start of the lease there is only one way it can go.
If the lessee and lessor are to have a successful motel investment throughout the tenure of the ownership of the business and property, the commencing annual rental needs to be a suitable market rent for that property. A lessor wants the highest possible rent they can achieve over the property and a lessee prefers to pay as low a rent as possible. This is the basis for problems arising and if both parties act in a reasonable manner then there should be no reason why a suitable market rent cannot be agreed upon.
To avoid these initial problems, if both lessee and lessor are armed with enough market knowledge and information about the business and property, then a suitable agreement can be reached. Problems arise where one or both act without proper research at which time they are more likely to make a bad decision.
Secondly, maintaining a suitable market rent throughout the term of the lease. Once a lease is in place often rents can become too high as a result of many factors such as loss of trade due to refurbishment being required to remain competitive, increased competition from other accommodation sources, fluctuations of supply and demand within the market, too onerous rent increases, utilities and other operating expenses increasing excessively and poor management etc.
Three areas that could be focused on here are, refurbishment of the property, increased marketing initiatives and possibly value adding to the business where possible. Refurbishment being required is a major issue within the motel industry. Often the best situation to resolve a problem of high rent is for the lessee and lessor to collaborate and work together to physically improve the property in order for it to remain competitive. This is easier said than done though if a lessor (or lessee) refuses to spend any money on refurbishment. Some lessors take the stance that once they lease a motel they have wiped their hands of it and it is the lessee’s responsibility now. This should not be and is not the case. If one wants their property to be a solid investment, what is saved by not upgrading overtime eventually catches up in the end.
An older or out-dated property that has been refurbished will not only be more competitive in the market but be able to achieve a higher tariff for its rooms and run at higher occupancy rates. It may also then be able to support the current rent payable or be in a position to support a higher rent to recover some of the investment made by the property owner for the refurbishment. This is often the heart of the issue for the lessor and their reluctance in many cases to refurbish a motel.
Annual rental increases within motel leases are generally calculated by the use of CPI however many leases that were entered into some time ago may still include minimum and maximum rent increases. Many of these however are now defunct as rents in some cases were increasing by as much as 9% per annum. Obviously this was not a sustainable situation and in the end both lessee and lessor suffered.
A motel lease is a contractual obligation the same as any other and carries the benefits and burdens as such. One must try to put in place a true market rent when the lease commences in order to avoid the rent being too high from the start and then compounding the problem over time as rents are reviewed.
Andrew Morgan
QLD Tourism & Hospitality Brokers
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