Why Buy a Leasehold Motel?
David Burrough, Hillhouse Burrough McKeown Lawyers
This is a question which we are being asked more often by people in the industry and people considering joining the industry. The commercial answer to the question is that the net return on a leasehold property is much higher than that on a "freehold going concern" and the entry cost is comparatively low.
There is potential for capital growth with respect to leasehold properties, particularly where a new owner is able to increase turnover and therefore net profit of an operation. Rents generally speaking are not related to turnover and therefore an increase in net profit is enjoyed by the proprietor of the motel rather than the landlord.
An increase in net profit means that on disposal of the property (note the industry average for turnover is about 2½ years for each owner of a motel) will result in the vendor of a business enjoying an increase in the value of the goodwill for which he is able to sell the property.
This is particularly so where there are still a good number of years left to run on the lease. Because of the higher return in respect of these properties as compared to freehold going concerns, one must consider the time-honoured investment slogan "Risk equals return".
Suited to a lifestyle
Purchase of a leasehold property is becoming increasingly popular with people (usually husband and wife teams) entering the industry for the first time. Before the decision is taken, intending moteliers need to think very carefully whether they are suited to a life in a particularly demanding service industry.
If consideration of those lifestyle questions is favourably resolved then many new entrants into the motel industry choose to buy a leasehold property.
As a purchaser of a lease you are purchasing the goodwill and chattels of the operation, not the real estate and buildings attached thereto. The cost of purchase of a leasehold business is approximately one third of a freehold going concern, yet the returns are considerably higher.
Consult with experienced adviser
One of the most important keys to ensuring a safe investment in leasehold motel property is to engage consultants experienced in sale, purchase and operation of leasehold properties. It is also essential that the appropriate lease documentation, contract for purchase and industry formulas be applied to your transaction.
The Motel Lease
The Motel Lease is an important asset which, if correctly structured, protects the value the tenant's business and the value of the landlord's freehold investment. However, a Lease that does not reflect current industry standards will be a cross that both parties will have to bear for many years.
The purpose of the Lease is to set out the rules by which the tenant is able to occupy the motel. It will also set out the responsibilities of both the landlord and the tenant.
Understand the lease document
It is important that potential Lessees understand that their occupation of the motel is controlled ultimately by the landlord through the Lease document. It is essential prior to purchase of the business, that the purchaser understands as much as possible about the Lease document and how it works.
Not only does this document affect his own activities in the motel business, but is also is an important part of the asset which is sold when the motelier decides to move on to another property.
The Lease document on the sale of the motel will be carefully scrutinised by an incoming purchaser and his solicitor to ensure that the new buyer is adequately protected. It is essential that the document be analysed by the purchaser and his consultants so that the motelier understands what costs he will be responsible for in relation to the property.