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New formula offers fair deal for motel leases

A solution to potential disputes, litigation and uncertainty in the motel lease industry is closer following a conference in Brisbane last week involving major stakeholders.

The conference, hosted by Resort Brokers Australia, looked to set a formula for determining a fair value for the short term motel leases. It also looked at establishing a common and transparent approach to calculating the price per annum for extending an existing lease.

Resort Brokers Australia’s managing director Ian Crooks said it was essential to agree on a formula that was equally fair to buyers, bankers and valuers and that would allow the industry to move ahead. He said increasing numbers of people were turning to motel leases as investments and that to date, there had been no uniformity or certainty in the market. “There have been instances of inexperienced investors paying too much for leases that may only have a relatively short term to run, and then being stuck with an asset for which there is virtually no market,” he said.
David Burrough, of Hillhouse Burrough McKeown who helped devise the formula, told the conference that there was a need for uniformity.

RBA sales manager Trudy Crooks said there was presently no protection for capital and goodwill which began to erode as a lease grew shorter. “At what point does a lease, which typically runs for 30 years, begin to erode. We think that starts at 20 years,” she said. “So what is needed is a formula that protects capital investment, shows the lessee the same return as a standard lease and allows for some goodwill or capital growth.”

She said the method arrived at was to (a) calculate the price of the short term lease as if it were a standard 30 year lease based on the net profit capitalised at an agreed figure (b) divide this by the number of years remaining on the lease (c) deduct this figure from the annual net profit (d) capitalise this figure by the same agreed figure to give the value of the short term lease.

“Using this formula makes it safe for everybody. We’re not saying this is set in stone but we’ve spent 15 months working on this and believe that it works to everyone’s advantage,” Ms Crooks said.

Tony Rossiter, a director of accounting firm Holmans, told the conference that a similar situation existed when it came to calculating a fair price to be paid for extending a lease. “There’s no methodology at the moment. There are significant differences in the approaches taken by various parties and it creates uncertainty. I’ve seen the amount paid per annum on lease extensions vary from nil to $70,000 a year. In association with RBA I’ve arrived at a formula calculator that has the potential to avoid disputes and provide a fair outcome for all parties,” he said.

Mr Crooks said it was now up to the industry to embrace the new system. “We’ve done all the research and come up with a proposal that we believe provides transparency and a fair deal for everyone. I believe that if we are to move forward, it should adopted throughout the motel lease industry,” he said.

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