Motel and Caravan Park Finance
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).
In essence we can see that there are three distinct asset ownership and operating models available to people wishing to make an investment in the motel and caravan park industry:
Investment Freehold Owner (Lessor)
Owns the freehold and collects rent. Much like the owner of any other form of freehold property investment. Very much a passive investment. Bank lending to 65% loan to valuation ratio available subject to meeting debt servicing requirements. Returns average 8% to 10% return on investment.
Owner Operator (Owns the freehold)
Owns the freehold to the property and also operates the asset on a day to day going concern basis. Pays no rent as the owner of the freehold and derives income from operation of business. Hands on business model although some operators will employ managers and take a more passive role. Banking lending to 65% loan to valuation ratio available subject to debt servicing requirements. Returns average 12% to 16% return on investment.
Leasee (Owns the lease to the business)
Owns the leasehold to the property and operates the asset on a day to day going concern basis. Pays rent to the freehold owner of the property and derives income from operation of business. Hands on business model although some operators will employ managers and take a more passive role. Bank lending to 50% loan to valuation ratio available subject to debt servicing requirements. Returns average 25% to 32% ROI (return on investment.) For experienced operators and/or particularly strong transactions gearing in excess of 50% may be available.
Tips for Financing Caravan Parks
Whether you’re a newcomer to the industry or a seasoned professional, the following tips are valuable to consider. With our extensive experience in finance and a nationwide client base, we’ve encountered various scenarios. While some situations may still surprise us, with some advance planning, it’s entirely possible to navigate the process with relatively low stress.
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“Hi Mike, We had settlement on Friday just gone and would like to say thank you for your advice and referrals you gave to assist us with our purchase of Grafton Lodge Motel. Everything went so smoothly and we are very happy to start our new adventure. If you ever go past don’t hesitate to call in and say hello.
Thank you again for everything you have done.”
Andrew & Donna – Grafton Lodge Motel
