Comparing the benefits of lease and freehold arrangements when buying a motel business.
The motel industry attracts a large number of people looking to buy a motel. Many are new to the industry and are testing the idea of the motel lifestyle. For those new to the industry there are many considerations to be made: will you choose a freehold or lease hold? How do you buy a motel business? Is it profitable?
The rest who are interested in buying motels are experienced moteliers and interested in trading up, or down, moving from a lease to a freehold or changing locations. Moteliers tend to move on quite frequently, with two or three year stints common.
Before you start your search, you should ask yourself the following questions;
- What part of the country do I NOT want to live in?
- Would I prefer city life, urban or a coastal location?
- Which is more important; cashflow, annual profit, future capital gain or lifestyle?
- Will a lease suit my needs, or do I want a freehold property?
- What does freehold going concern mean?
Benefits of a lease
The benefits of a lease are that they can be cheaper than a FHGC – they provide a better return on investment (usually 20-25%) and they can be on-sold for a profit if the Lessee improves the business. A Lessee purchases the chattels and the right to run the business for the term of the lease. This is the upfront price of the lease (or “key money'” as it used to be known as.) The Lessee also pays the Landlord an annual rental and meets many of the outgoings.
It is important to be aware of the length of the lease as a short term lease may be difficult to on-sell. Many Landlords will sell additional years on a lease, but they are not obliged to do so. It is very important to understand the obligations of the Lessor and the Lessee, especially to do with maintenance. A good operator can make a healthy annual profit from a lease without having to fund the acquisition of the land and buildings.
Benefits of Freehold Going Concern (FHGC)
A benefit of a Freehold Going Concern is that you own the land and buildings as well as your business. Because the initial cost is much higher, the return on investment is usually lower than that for a Lessee. However, the freehold may attract capital gain. The owner of the freehold has the option of selling the business lease, which will reduce his capital outlay and provide a steady rental return.
The benefits that all motel operators enjoy include the fact that their business provides them with a home, and many of the usual domestic expenses, such as electricity, rates, insurances etc are met by the business. The equivalent value of this can be up to $25,000 per year.
Our Service To Buyers
Looking to purchase a motel business? Whether you are opting for a lease or freehold arrangement, LINK has a dedicated team experienced in all aspects of the motel industry. We list many motels for sale across the country. We can offer suggestions about lending institutions, valuers and legal advisers and assist negotiations with vendors.
- Offer suggestions about lending institutions, valuers and legal advisers.
- Assist in negotiations with vendors.
- Draw up a sale and purchase agreement, suggesting appropriate clauses.
- Work with your professional advisers and assist with the due diligence process.
- Manage the general sale process to conclusion.
Use the search box in the sidebar to browse motels for sale in your desired region, or get in touch with our tourism industry specialists.
