The purchase of an interest in a motel can either be
by way of freehold or leasehold acquisition. As the
term suggests,
a freehold purchase is the acquisition of the physical
motel property. The purchaser can either be intending
to manage
the motel as owner operator or to act as an investor.
In the latter case the motel would be operated by a
lessee who
would pay rent to the freehold owner. The more common
motel transaction involves the purchase of the leasehold
business. In this case the freehold title to the motel
is owned by an investor who has sold (or is selling)
the lease. The
incoming lessee purchases the leasehold interest either
from the outgoing lessee or the freehold owner. In essence
the
purchaser (lessee) is buying a business (the leasehold)
from the current business owner (either the existing
lessee or
the landlord, also known as the freehold owner or lessor).
As well as purchasing the business (including any equipment,
chattels and stock) the lessee pays a monthly rental
to the landlord (lessor).
The purchase of a motel lease should be approached with
the assistance of industry professionals. It is essential
that
an industry expert accountant review the financial records
of the business and ensure that the net profit after
rent can
be verified. The accountant will also provide tax planning
advice, assist with the setting up of business entities
including
companies and trusts and complete cash flow forecasts
for the business. The accountant can also be of invaluable
assistance in framing the business plan that will be
required by the lender in support of the finance application.
The purchaser’s lawyer should be familiar with
commercial leases and particularly motel leases. The
validity of the
lease, the vendor’s right to sell and the obligations
of the lessee are all areas requiring specialist legal
advice.
Motel lease finance is also highly specialized. Most
banks will lend up to 50% of the value of a going concern
motel
lease. Terms will usually be dictated by the term of
the lease with 15 years Principal and Interest being
common. The
lender will require security by way of a charge over
the motel lease together with a landlord’s deed
of consent and right
of entry. The deed of consent is required as most motel
leases include a provision which obligates the lessee
to have
the land lord’s approval in terms of the lease
being used as security for a loan. The bank will require
a right of entry as
this allows them to enter the motel and operate it should
the borrower default on the loan.
Lenders will require the motel lease to be valued by
an industry expert valuer. The costs can be substantial
and must
be covered by the borrower. Likewise, the costs of preparing
the specialised security documents required can also
be
significant and should be allowed for when the motel
lease purchaser is calculating the total costs of purchase
and
finance.
Many motels continue to generate a significant return
on investment and are a great opportunity for operators
to derive
substantial returns on capital invested. While the purchase
and finance process can be intimidating for first time
entrants the use of specialists in all fields will certainly
make the process that much easier.
