Hi Jacko10
Thanks for the KPI info. Good phrase to have.

17 years is shorter than ideal, so cause for a lower offer.
30% cap rate for a leasehold is based on an absence of a range of negative factors which if present may detract from the desireability of the business and property, several of which factors are major or higher than normal expenditure pending, or less than 21 years remaining on the lease. Buyers think …. ” hmmm 21 years on the lease less a few for me to operate it, then I sell with say 17 years remaining, hmmm, not long before it runs out, so let’s estimate the annual cost of amortisation of that lease by dividing the cost price by 21, and deduct that from the annual profit, because when I sell it with 17 years remaining, the annual cost will appear higher to a buyer (lower profit) and the end of lease will appear closer, negatives. “

But with a lease of 25 or 30 years, buyers tend to regard it as a life sentence and don’t bother to amortise it as a cost. Just human nature.

So, provided all other things are equal in a comparison, a 17 year lease is worth less than a 25 year lease.
Fixes are : (a) lower the sale price to compensate, or (b) vendor secures agreement with the landlord and buys more years from the landlord, and the lease document expiry date changes.

What other methods of valuing ?
Wow, big selection, but trying to put it in a nutshell :

Consider that you are buying a commercial income stream (leasehold) with a limited lifetime of say 5-7 years, before you sell. Then it is clearly about purchase price including purchasing costs, nett income after expenses and value of benefits during that holding period, and nett re-sale price after selling costs. Compare that as a ROI % and you have a rough basis for comparing various leases as apples to apples. Assuming you got your money back ( incl buy n sell costs) on re-sale, then % ROI is simply income divided by cost x 100.

Very simplistically it looks like :
COST PRICE
INCOME + BENEFITS
SELLING PRICE

(value of benefits ? up to you = cash, depreciation, free home, tax benefits, inclusions like internet, austar, pool, commercial food “wastage”, phone, utilities, no commute, self employment, high cash flow, low debtors, priceless kids business & hospitality training by osmosis, etc etc. )

Prepare for CGT triggered by re-sale.

Get expert qualified accountant opinions on this and anything else here, usual disclaimers apply because I’m not a financial planner, accountant or expert. Long live all the lawyers.

Cheers
thecrest

Hi Teabag.

Sorry I don’t understand the term “KPI” .

Don’t do bonsai but admire them, it was a meaningful logo for us though (plant a tree, eat the fruit, not the tree).
Haven’t been to Como for years, but loved Blue Heelers.

There are a few other ways of motel investment and some typical returns are listed :
Tenant/Leasehold owner – operate under management,(pay rent to Landlord freehold owner) 22-30%
Tenant/Leasehold owner – owner operator,(pay rent to Landlord freehold owner) 30%
Landlord freehold owner – lease property to Tenant/Leasehold Owner. 9-9.5%
Landlord freehold owner – owner operated 15%

We used to avoid considering investment in mining towns because if mining slows or closes, investment stalls, exit strategy gone.
Preferred a more diversified customer base to spread risk. However, a 5 – 7 year in & out plan would be an acceptable risk in a strong area like Singleton or Muswellbrook NSW. Bob Brown is not encouraging us at all.

Comparison of the value of one motel to another is a valuer’s job, but we use a few different measurements.
To compare apples to apples, one must make them all apples.
That means levelling the playing field so that you are comparing motels on an equal basis, and this requires
considering a number of factors such as :
Cost required for renovation or repairs to bring each motel up to a standard where it’s operational without further unreasonable expense.
Running costs above normal.
Risk factors pending such as town by-pass, new construction of competitor, strength of local economy, etc.
Cost of periodic refurbishment – that time when you’re glad you have only 30 rooms not 75.
% ROI. – $ Nett profit divided by cost price x 100.
NPAR. – $ Nett profit after paying rent and expenses.
Annual average occupancy rate %.
RevPar – Revenue per average room available, calculated as total annual revenue divided by average number of available rooms, which excludes periods for rooms off-line for repairs.
Rent to Sales %.
Any upside opportunity such as expansion, upgrade or increase in tariff.
How much will rent be in 5-7 years time according to the lease formula ?
Quality of Lease clauses – friendly or onerous? Term remaining etc.

You could summarise by asking how strong and reliable is the nett income over the next 5-7 years ?
And all things considered, how much will that nett profit be ?
And how much did I have to pay to buy that income stream?
Ease of operation ? (nobody wants daily operational headaches from something with square wheels)
And will the motel be a desireable property to buyers when I sell?
And can I get my money back or better?

We’re not developers. But there are opportunities for those with reno experience
who could reno a motel suffering from low figures due to tired rooms,
operate under management for about 2 years to develop credible figures,
then sell or lease it out. (CGT)

Hope that sheds some light.

Cheers
thecrest