Leasehold motel tenure has been a very successful type of motel ownership and operation for decades.
It grew very quickly in the early 1990s and has remained an attractive option for motel ownership for very good reasons. The many benefits of owning a motel lease is why many moteliers continue to expand their motel investment portfolios. There have been many changes within the motel leasing industry over the last few years. This has largely been on the back of changing markets and the industry adapting to these changes. Some of the benefits of a leasehold motel business include the main buying motives of any business investor, the financial, lifestyle and security benefits available.
- High returns on investment. The returns on investment for motel leases are strong and, in the main, range anywhere from 28 percent to 40 percent depending on certain factors such as location, length of lease, level of rent, economic strength of the region, standard of property, strength of business, etc.
- 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.
- Taxation benefits. 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 standalone home, such as insurance, electricity, food, beverages, telephone/internet, rent/loan repayments, motor vehicle costs, etc.
- Quality presentation. If a budget to buy a motel is one million dollars, the opportunity exists to buy a much higher quality motel property under lease than a freehold motel at the same budget.
- Long lease tenures. On most occasions, leases 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.
- 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.
- 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.
- Easily 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 management couples available who can manage a motel day-to-day.
- Onsite residence. This offers a home to live onsite for the family, allowing more family time together while operating a business. Children can also get involved in some ways and start learning from a young age.
- Downtime during the day. 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.
- Long term leases. Often, leases commence at 30 years in total, split up with option periods. The ability to extend leases as the term of the leases diminishes is more often than not available.
- Lease terms. Leases are predominantly set up on mutually beneficial commercial terms to the lessee and lessor and therefore work very well.
- Asset ownership. Includes the title to all the plant and equipment in the motel and the remaining tangible and intangible assets, such as business names, contacts and goodwill.