Leasehold motel values
The main four areas that will maximise the value of a motel lease within the marketplace are the term of the lease, the annual rental, the presentation of the property and the net maintainable profit.
If these four items are in order and satisfactory to a particular buyer, then a premium can comfortably be achieved for the motel business.
These items affect every single motel lease in the market in different ways and in many instances buyers will lean towards one or two areas having greater importance over others. If all are in order though, potential buyers will be lining up to buy a quality business in every area. This is the competitive bidding environment that every seller in every market should be looking for to maximise their sale value.
1. Term of lease – The length of a lease is important for many reasons, on-selling in the future, lending criteria being satisfied and security of tenure. What is the ideal term of a lease is different in each case, however lenders often quote to their customers that they prefer to have 20 years remaining on a motel lease. It has been argued in the past that that a 10 or 15 year lease is a long term lease.
Obviously the longer the lease the better for the reasons mentioned however it is common practice for leases to be extended on a regular basis between lessees and lessors depending on each parties requirements.
2. Annual rent – The breakeven point of rent being too high within a motel business is determined several different ways. Once rent is deemed as being too high, unless something can change that potential buyers get very nervous about it. The breakeven point has long been seen by the market as being 50% of the total net maintainable profit of the motel. If the net maintainable profit of the motel is $200,000, then buyers become cautious once rent exceeds $100,000. This is not such an issue for those who can see potential upside in the business and believe they can build the motel’s trading back to a level where the rental falls below the breakeven point. It will no doubt still affect the value though where a higher rate of return is expected on the purchase price.
New lease rentals are often put into place at sub 45% of the total net maintainable profit of the business.
3. Presentation – It doesn’t matter whether you are buying a motel business, house, car, or tee shirt, everyone wants to buy something that looks good, presents well and doesn’t need a lot of money spent on it to get it looking nice again. Poorly presented motels are no different. When a potential buyer walks onto the property and their first impressions are that they like the presentation, they then want to see more. When they walk onto the property and cringe, any offer made from there (if at all) is not going to be very exciting to a seller.
Motels that are in a poor state of repair have always been punished hard by the market. Interest levels diminish knowing how much money has to be spent on the property, therefore what they are prepared to pay for the business is downgraded.
4. Net maintainable profit – The net maintainable profit of the business is a quantitative measure that directly affects the value of the motel business. The return on investment expected by the market on the business’ net profit provides a direct link to the value of the motel. For example a net profit of $200,000 after rent and all expenses against a 30% capitalisation rate will indicatively show the value at $667,000. However a reduction/increase in profit of only $5000 will result in a decline/incline in value of $17,000.
If any of the four areas are seen to be an issue by the market then addressing them prior to selling a motel lease will help maximise the motel’s sale value.
Not addressing an issue and hoping it will go away or will be ignored by potential buyers is not going to end in achieving a great result.
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