motel and caravan park buyer’s handbook...your experience and the serviceability of your debt. a...

Tourism Brokers Pty Ltd Licensed Real Estate and Business Agents

Centralised Administration Ph: 1300 512 566 E: [email protected]

TOURISM BROKERS “Working Together”

MOTEL AND CARAVAN PARK BUYER’S HANDBOOK




TOURISM BROKERS FIRST BUYERS INFORMATION BOOKLET

CONTENTS

Tourism Brokers Introduction 3 - 4 Motel and Caravan Parks - Overview 5 Use Industry Specialists 6 Identifying the Right Business 6 Property Inspections 7 Negotiating to Buy 7 The Sales Process 8 - 10 Annexures Annexure 1: Why Buy a Leasehold Motel 11 - 14 Annexure 2: Understanding the Lease Document 15 - 18 Annexure 3: Right of Entry / Mortgages and Deeds of Consent 19 Annexure 4: Finance Insights 20 - 26 Annexure 5: Industry Averages and Ratio 27

Annexure 6: Glossary of Industry terms 28




Tourism Brokers Introduction

Tourism Brokers is a unique combination of a group of established, experienced and professional Motel and Caravan Park Brokers who started operating in February 2005. We have a simple philosophy of providing an unmatched level of service within the Accommodation and Hospitality Sectors. We are strategically located around the states of Victoria, New South Wales and Queensland, with Directors based in Sydney and Newcastle. We have specialist sales consultants based in Brisbane, Gold Coast, Rockhampton, North Queensland, Sydney, Foster, Bathurst, Wangaratta, Melbourne, Lakes Entrance and North-West Victoria. This strength allows us, with the aid of modern communication systems and data bases, to provide greater face-to-face contact with owners for appraisals, listings, inspections and settlements and Buyers for meetings and Inspections. Owners and Buyers are the winners in this circumstance as our level of service is superior. The unique part of Tourism Brokers is that we are truly “Working Together” for the best result for you. As Brokers we are not “competing” with each other for sales, rather we are assisting each other - a massive advantage to owners and buyers alike. Confident in the provision of outstanding Industry service, we believe we will do the best possible job assisting you as a buyer in this sometimes complicated Industry. Tourism Brokers, through our specialist knowledge of the accommodation and hospitality sectors are well qualified and experienced to give the advice you require to purchase your specialist property. Successful negotiations need a win-win for all parties and whilst being engaged by owners to maximise their returns we regard highly the supply of the required information to enable informed decisions for you as a buyer. Our broad network assists you in that regard. Opportunities abound in the marketplace for all with a large number of sales being made. Tourism Brokers are well established in a number of states. It helps that all the team members have either owned or operated businesses and have experience on both sides of the counter. We have a vast knowledge base to call upon to add value. We firmly believe that Tourism Brokers, its personnel and its network, has the expertise, professionalism, know-how and enthusiasm to be the best representative available to assist you in securing the best Business opportunity.




Motels and Caravan Parks (CVP)

Overview The first steps revolve around researching the industry to get a feel for what is required. Operating a Motel or Caravan Park is not rocket science but you need to be aware of its operations, warts and all. You need a healthy work ethic, and effective operational systems based on cleanliness and friendliness. Set your criteria for what you are looking for but don’t expect to get everything. If you get 80% of what you’re looking for you will be doing very well. Too much research can be counter-productive. We call it paralysis by analysis. To a large degree you should go with your gut feeling. In the Motel/CVP industry we regularly talk about industry averages and expected ratios. Use these as a basis for your analysis but don’t rely 100% on them. There are always good opportunities that lie outside the general industry averages. The motel industry has 24/7 commitment but if you put the right operational systems in place you can organise reasonable time away from the business. There is quite a deal of downtime in operating a motel or caravan park. The accommodation industry can be a very profitable one for you as an operator and one of the greatest advantages is that you can add significant value within a short time. Buying a motel or caravan park need not be complicated, but the pitfalls are many if you’re not properly advised. Using an inexperienced advisor will often result in nothing but a waste of time and money and even more seriously an avoidable bad investment. It is vital that you engage industry specialists and get the right advice. It’s most important that you determine your buying capacity very early. Banks these days are very restrictive in their lending policies and you need to speak to an industry specialist. Your borrowing capacity when purchasing a Motel or Caravan Park is very different to purchasing residential property. In addition to the equity you personally have to invest, financiers will take into account your experience and the serviceability of your debt. A discussion with a specialist accommodation industry finance broker is highly recommended. Getting an early indication of your buying capacity and an idea of your projected purchasing costs will set you up in the right direction. Banks will typically loan 50% of the value of an operational business. They will generally use the following criteria to assess your financial position: your current financial position with regard to assets and liabilities, the amount of cash you have to contribute to the purchase, the level of equity you have in other Investments, any previous experience within the industry and the financial wellbeing of the property you were looking at. In general, they will require three years of accountant financials from the property they are assessing. Owners can be very protective and private regarding their finances, and you will be required to sign a confidentiality agreement before receiving business financials. They will generally expect that you will be prequalified with your own finances before they issue theirs.




Use Industry Specialists You need to get a Solicitor, Accountant, Finance broker and a Motel/Caravan Park broker who specialize in the industry. Your family solicitor or family accountant may have done a great job for you and your family in general work, but if they are not working constantly in the Motel/Caravan Park Industry, they will not be able to serve you effectively in your purchase. Similarly, a local real estate agent doesn’t have the expertise to assist in the purchase. Tourism Brokers are proud to say that all our sales staff own or have owned and operated Motels and Caravan Parks and have a thorough knowledge of the industry. We are constantly in touch with Motel and CVP owners and operators and are well abreast of industry operations. The broker is the linchpin in the transaction. It is their understanding of the industry and knowledge of the properties you are looking at that provides the vital link in the sales process. Identifying the Right Business Make your list of “must have’s”, but don’t have too many pre-conceived ideas when you start looking at properties. Keep an open mind and “take your blinkers off”. There are several variables that you come across in your early investigations. Freehold or Leasehold With leasehold properties, you need to be fully aware of all the lease conditions and make an assessment on the sustainability of the lease. The size of the property Whether you want a larger operation which can be run with staff or do you want a smaller operation where you do most of the work. Location Is there a particular area that you want or are you prepared to locate where the right property is. Restaurant Do you want a food and beverage operation or a bed and breakfast. Don’t be turned off buying a motel simply because it has a restaurant component that you are not comfortable with. There can be many advantages in providing food and beverage to your guests and there are many easily prepared food options available. If you don’t have a passion for hospitality we strongly suggest that you operate your restaurant for in-house guests only. This generally means that you will only open your restaurant Monday to Thursday nights to cater for your corporate clients. Owner’s residence This will be dependent upon the number of family members that will be with you. State of repair of the property Are you looking for a property and business that needs a substantial upgrade or one that is operating well and needs little in way of improvement. Financial return on your investment What level of income are you requiring from the property. Keep in mind that a massive advantage in operating a Motel or CVP, is that you live out of the property.




The bulk of your living expenses (accommodation, electricity, telephone, motor vehicle, etc.) are part of accepted Business expenses. Your first place to look for the right property is our Tourism Brokers website. (www.tourismbrokers.com.au) It allows you to search for properties with as little as one criteria or many, including Freehold or Leasehold, Motel or Caravan Park, Price range, by State, a Specific Region or even just one town. For any properties that interest you simply select the ‘Email Me Further Details’ option a full Information Memorandum on the property. We also offer an extended pictorial feature of the properties with our Property Slideshows. Feel free to telephone our Brokers and “pick their brains” on properties or the Industry in general. Property Inspections You will make a short list of properties that you have an interest in and in consultation with our Broker who has listed the property, you will organise an inspection of the property. Keep in mind, that at this stage you should have developed a relationship with a Finance Broker, who will have qualified that you have the capacity to buy the property. If you want to inspect properties as part of your investigation stage prior to financial qualification, let your Broker know so that a preliminary property inspection can be organized and the owner can be made aware that you are investigating the market. In this instance, a full property inspection will not be required. Quite often at this stage intending buyers may just decide to “stop over” at a couple of properties to get a feel for them, without taking up too much of the owner’s time. You will generally find that owners will be happy to discuss the property and the industry with you as long as it is not in their busy time of the day. Keep in mind that most times owners will require discretion when having inspections. They may not want staff, other Moteliers/CVP owners and the guests know that their property is for sale. Ensure that all the contact with the property owner is made through The Broker. Inspections need to be arranged after check- out and housekeeping has been finished and prior to guests arriving in the afternoon. The ideal times are generally late morning or early afternoon. Give at least a couple of days’ notice for inspections. Out of courtesy, let the Broker know if you are delayed or can’t make the appointed time. Remember to remain discreet and not disclose confidential information about the business. During inspections, you shouldn’t talk to staff without the owner’s or Broker’s permission. Negotiating to Buy When you have found the right property and you are confident that your Finance is in order, you will begin negotiations with your Broker to buy the property. Your Broker is experienced in these negotiations and will give you all the assistance you need. Once you have an Offer to Purchase accepted by the owner, you will enter into a “Heads of Agreement” with the owner for the purchase

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of the property. This document is not a legally binding a contract, and is used to draw up the Contracts for Sale. In Queensland transactions, the Broker can draw up the Contracts for Sale and send them through to the respective Lawyers. In other States, the owner’s Lawyer draws up the Contracts. The process from offer and acceptance through to settlement can be a very prolonged and frustrating one, so you need to be patient. Having industry specialists working for you during this time can be a significant advantage. Financial due diligence can take two to three weeks, legal due diligence can be similar and finance approval these days is usually four to six weeks depending if a valuation is required. The Sales Process: Accountant Due Diligence The Financial due diligence process occurs when your accountant analyses the Business, reviews the performance of the property, and verifies that the figures and the business financials are accurate. The accountant’s verification usually involves an on-site visit to the property. This provides the accountant the opportunity to meet the owner, access the books and records and provide first hand observations on the suitability and sustainability of the income and expenses included in the vendors financial accounts. As well as giving you peace of mind that the business is suitable for you, the due diligence reports can be very important documents to assist with your finance. It is critical that you get an industry specialist accountant to complete the due diligence. Accounting due diligence is generally done prior to legal due diligence to avoid legal expenses if the due diligence process shows that the property “doesn’t stack up”. Legal Due Diligence This essentially involves identifying the property, reviewing the contract, reviewing the lease document, any licenses required, franchise agreements, supply agreements and intellectual property. Costs of Buying In addition to the Purchase Price you will need to consider other costs. These include stock, pro-rata adjustments to service agreements, Council rates and advertising, franchise or chain fees if applicable, stamp duty if applicable, accountant’s costs, legal fees, removal expenses, and any training course costs. As a guide to Costs of Buying, use 10% of Purchase Price (includes 1 month rent in advance).




Licenses to Operate* Whilst there is no particular licence required to operate a M otel or C aravan P ark, most businesses include either the provision of cooked meals or the supply of liquor or both. In such instances, the contract is generally conditional upon the transfer of the liquor licence to the purchaser and the purchaser obtaining a food licence. Liquor Licence - Of all the steps in purchasing the M otel or C aravan P ark, the transfer of the State Government administered Liquor Licence often takes the greatest length of time. This is largely due to government department transfer processing times rather than the work necessary to achieve the transfer. As a result, it is critical that the purchaser’s lawyer obtains the transfer consent paperwork from the vendor as soon as the contract has been entered into. That way, the application for the transfer of the liquor licence can be lodged as soon as the purchaser has completed their necessary training. You may also need to complete the responsible service of alcohol course depending on your past experience. Food Licence - Food licences are issued and monitored at a Local Government level. Accordingly, every local authority has a slightly different mechanism and paperwork for being issued with a food licence. Some authorities will transfer licences, whilst other authorities will insist on the issue of a new licence. Regardless, the obtaining of a food licence is generally a procedural exercise although it is important to familiarise yourself with the requirements of the licence and the inspection timeframes. * reference Pevy Lawyers Buying Entity - Ownership Structure * Aside from finding the right property, one of the biggest decisions you will make in the early part of the purchasing process will be the structuring of your purchasing entity. This could be anything from personal names, a company in its own right or as trustee, a type of trust or even a partnership with other likeminded persons (who either share operational responsibilities or fulfil a silent role). Your decision making with respect to structuring should be weighted on a combination of asset protection and tax minimisation. No one likes to pay more tax than they should, and no one wants to expose their life savings to a lawsuit. It therefore follows that the best advisors for your structuring will be your accountant and your lawyer. Like most things in life, there is no universal solution for all potential purchasers. Whilst some vehicles such as family discretionary trusts are quite commonplace, correct structuring can only be determined from an analysis of your personal and family circumstances, including any past investment and business dealings. Once your entities are set up and determined, it is also important for your accountant to register any new entities for a Tax File Number (TFN), Australian Business Number (ABN) and Group / PAYG / GST taxes if appropriate. * reference Pevy Lawyers




Settlement Settlement usually takes place six weeks after exchange of contracts. It is in that period that the legal due diligence is carried out. It is also during this time that you will organise the transfer of telephone, electricity and gas and arrange for your EFTPOS machines to be ready. Training at the property is usually conducted a few days prior to settlement and a few days after settlement. That is the time when you will be with the owners of the property to familiarize yourself with the day-to-day running of the property. Settlement day will usually involve a stocktake of consumable items and adjustments for things like advance deposits and stop-overs. Acknowledgments:

• Tony Rossiter from Holmans Accounting

• Mike Phipps from Mike Phipps Finance

• Trent Pevy from Pevy Lawyers

• David Burrough from Hillhouse Burrough McKeown Lawyers

• Chris O’Brien and Michael Bigalow from Fishburn Watson O’Brien Lawyers




Annexure 1: 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.

tip Remember that when you buy amotel lease, there are expenses,known in the industry as"ingoings". These include:

bank fees solicitor's fees accountant's fees government stamp duty insurance.

Work out exactly what theseexpenses are and don't leaveyourself short.




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 he 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. Term The length of a tenant's tenure and security will be derived from the Lease. This is extremely important in creating the maximum value in a motel business. Obviously, a business which has 5 years left to run under its lease is of far less value than one with a lease which has 20 years left. Where a lease has a few years left to run, a tenant should seek advice as to the details of the formula recognised in the industry which applies to negotiations for lease extensions. A tenant will in effect buy more years to add to the term of the lease. Enforcing the idea that short leases are of greatly reduced value is the fact that should a purchaser wish to buy a leasehold motel, obtaining finance will be particularly difficult when the remaining tenure of the lease is short.




Leases generally run for an initial 10-year term with two or three options of five years each, capable of being exercised by the Lessee of the property. The Lease should provide for the purchase of the chattels of the business by the landlord on expiry of the Lease. Rent The Lease will set out the amount of the rent and how it is to be paid to the landlord. It is essential that anyone considering purchasing a motel lease has experienced consultants to consider the rent compared with industry standards. This is important when assessing whether there is any room for improvement in the profitability of the business and whether the business is readily saleable. Rent under the lease is paid calendar monthly in advance and usually there is provision in most new lease documents for an increase in rent pursuant to the Consumer Price Index on an annual basis. Repairs and Maintenance An important subject for any motel lease is repairs and maintenance. It is a feature of most well drawn Leases that responsibility for maintenance and upkeep of the motel is clearly set out. It is important that the Lease clearly specify who is responsible for the replacement of the fixtures and fittings when they come to the end of their working life. It is a feature of most Leases that responsibility for maintenance and upkeep of the motel is left to the tenant. The rationale behind this is that the motelier does not want his business suffering whilst he waits for a tardy landlord to effect repairs to the property. It is far more desirable that the motelier be in control of the maintenance of his own building so that his business is not adversely effected. The results of the analysis of the Lease in terms of cost to the tenant could be conveyed to the purchaser's accountant prior to any Contract for the purchase of a property becoming unconditional. Landlord's consent? (Assignment of the Lease) Like many businesses, the sale of a motel lease is not simply a transaction between a vendor and a purchaser. In any business where the premises are leased, a landlord must give permission before the lease can be transferred. There are no set rules for obtaining the consent of the landlord. In some cases, the landlord will wish to meet with the proposed purchaser, in others the landlord will simply want to see the references, resumes and financial information in respect of the proposed purchaser. Any person looking at purchasing a motel leasehold business should ensure that they have their references and resumes ready to go. This will avoid any possible time delays during the transaction.




Generally, the landlord will ask the proposed purchaser to provide the following documents:

• a resume from the purchaser (or if the purchaser is a company the directors of the purchaser) the resume should highlight the previous business experience of the purchaser and in particular any experience that will prove that the purchaser has the qualities necessary to operate a motel

• two personal references (i.e. someone who knows the purchaser on a social basis should

provide a short-written letter saying what a fine, outstanding member of the community the purchaser is)

• two business references (from two people who have known the purchaser on a business basis.

These references should confirm in writing that the purchaser's dealings with them have been professional and that the purchaser has the qualities necessary to operate a motel)

• a statement of assets and liabilities (the landlord will want to be able to determine that the

purchaser has some financial stability and will be able to continue to pay the rent)

• details of any borrowings by the purchaser (again the landlord will want to be able to determine that the purchaser will be able to continue to pay the rent. The landlord will also want to understand if there is anyone else (i.e. a bank) with an interest in the lease).

Generally, a landlord will want to satisfy themselves that you do not have any criminal convictions, you have a good character, your financial standing is sound and you will be competent at your job. A landlord is not able to unreasonably withhold his consent to the transfer of the lease.




Annexure 2: Understanding the Lease Document

Trent Pevy, Pevy Lawyers As the cornerstone of your relationship with the landlord, the lease is the most important document for a leasehold motelier or caravan park operator. It is also a very often misunderstood document, notwithstanding that it is capable of adding or reducing hundreds of thousands of dollars to the value of the motel or caravan park operation. Term Whilst rent may be the most obvious lease provision to a purchaser, the term of the lease normally has the greatest impact upon the value of a leasehold motel or caravan park. The term of the lease can either be stated as a set number of years from commencement, or more commonly via an original term accompanied by sometimes as many as five further option terms of five years each (which you may see recorded as a 5 x 5 x 5 x 5 x 5 lease). Option terms in theory provide flexibility for a tenant who may not want to commit for the full term. The reality of course is that failing to exercise an option would be commercially senseless. A landlord may also view option terms as another means of keeping the tenant accountable. Typically a landlord is not obliged to recognise the exercise of an option by the tenant if the tenant is in default (for example, behind on rent). Any term in excess of fifteen (15) years will not normally impact upon the financing of the business (as banks tend to structure their business loan out over a maximum of 15 years). From a tenant’s perspective, it is therefore always best to pursue a top up of the balance lease term before it drops below this threshold as it may hinder the ability to sell. Advice should be taken prior to negotiating an increased term with a landlord, who may be eager to work on an industry formula for determining the value of each additional year added to the lease. Rent and Rent Review From a buyer’s perspective, the importance of rent is only surpassed by the balance of the term remaining on the lease. You can expect your motel or caravan park rent to be payable by equal monthly instalments in advance. The manner in which rent is reviewed differs from lease to lease, although by far the most common method of review is adjusting the rent in accordance with movement in the Consumer Price Index (CPI). CPI is a government statistic measuring the rise (or fall) in cost of living across numerous different categories as wide ranging as fuel to bananas. Whilst nevertheless arising in many leases, market reviews and other subjective increases at the discretion of the landlord should be avoided where possible (note however attitudes and expectations differ on this point depending on the location of the motel / caravan park). Most market reviews also operate solely in favour of the landlord, meaning they are virtually a no-win situation for the leasehold owner.




Outgoings Motel leases can go to painstaking levels to describe the outgoings and services associated with the land and the operation of the motel that are payable by the tenant. Generally, any costs associated with owning the land are payable by the tenant. This can include the landlord’s land tax (following the removal of the restriction that previously forbade landlords from recovering this charge from tenants). Assignment The landlord is entitled to satisfy itself that the prospective buyer complies with the qualification criteria set out in the lease. It is almost always the tenant’s responsibility to ensure the person to whom it sells complies, although it must be pointed out that the landlord (and its financier) cannot unreasonably withhold their consent to the assignment. It is important that these provisions are suitable for a motel / caravan park arrangement. There should also be an obligation on a landlord to not unreasonably withhold its consent to the mortgaging of the leasehold interest by the tenant. First Right of Refusal Most leases will include a condition on assignment that the landlord must first be offered the opportunity to acquire the business on terms no less favourable than those entered into with a prospective purchaser. Quite often, the offer need only be held open for 14 days. You can also expect there to be a reverse provision – allowing a tenant the first opportunity to purchase the freehold if the landlord chooses to sell. Maintenance and Redecoration In a motel setting, often the maintenance and repair obligations will link to the retention of the AAA star rating for the motel (assuming it is rated) and when the particular item requires replacement or updating. For self- rated motels, the maintenance and repair obligations are more ambiguous and subjective, instead relying on each party’s interpretation of what being ‘in good repair’ and to a ‘first class standard’ may mean. To help overcome this subjectiveness, an unrated property may also have written into the lease that redecoration is to happen so many times within a set number of years. Like regular commercial leases, the landlord carries the responsibility for most capital repairs (including all structural works). But unlike regular commercial leases, the responsibility for capital repairs is regularly shifted onto the tenant by the dedication of many items that an outsider would consider to be landlord property to instead be the property of the tenant. For example, modern leases will often provide that floor tiles and coverings, shower systems, vanities and built in cupboards are the property of the tenant and hence the obligation on the tenant to repair and replace. Although it may seem strange, we prefer to see most of the repair obligations fall upon the tenant, as it allows the tenant to maintain control over the level, standard and timeliness of upkeep of




the accommodation. This is important given the key link between the standard of the motel and the profitability of the business. As a leasehold operator, you do not want your business suffering because the landlord is slow or cutting corners in their maintenance of the motel. Insurance The lease will almost always requires you to hold (or reimburse the landlord) for public risk insurance, plate glass insurance, building insurance, landlord’s loss of profits insurance, worker’s compensation insurance and any other insurances reasonably required by the landlord. These insurances will also likely be a term of any finance approval. Regardless of the wording in the lease or the finance letter of approval, it is recommended any purchaser seek specialist advice from an experienced insurer broker to ensure that sufficient policies of insurance are held to adequately cover all risks to which a motel or caravan park operator are exposed to in conducting their business. Any insurance policies relating to the business should also note the interest of the landlord and mortgagee. Restriction on Mortgaging your Interest Most leases provide that a tenant cannot mortgage its interest in the lease in favour of its bank without the landlord’s consent. It is therefore important to seek this consent and ideally pursue the landlord to include a provision in the lease whereby it cannot unreasonably withhold or delay its consent to your bank taking security over the leasehold interest. Termination If you default as a tenant under the lease, the landlord may attempt to terminate the lease and re-enter the premises or alternatively convert your lease to a month to month tenancy (subject to any right of entry requirements granted in favour of your bank). The landlord must comply with the Property Law Act 1974 in taking steps to terminate your lease. Unless stated otherwise, this includes providing you with a notice outlining the breach relied upon, and affording you a reasonable opportunity to remedy it (generally considered to be fourteen (14) days). Of course, if the lease is terminated as a consequence of your default, the landlord may have a cause of action against you for the balance of rent under the lease and any other costs it sustains. In such circumstances, the landlord is generally obliged to take all reasonable circumstances to mitigate any loss sustained. End of Lease Procedures In an era of long term leases and the financing of motel and caravan park purchases, the reality is it is extremely unlikely that a lease will expire. This is because a landlord and a tenant would usually negotiate a new lease well before the end of the lease term, to ensure the business’ future saleability.




Strong consideration should nevertheless be given to end of lease procedures, as they can impact on sale prospects. Most leases will oblige the tenant to maintain the facility to ensure it continues to enjoy at least a certain star rating or standard. With regards to the tenant’s property, given much of it is impractical to remove (for example toilet cisterns, vanities and floor coverings), it is important the lease contains a condition that the landlord must purchase the tenant’s property in the motel at the end of the lease. Such a clause should provide that if a price cannot be agreed, it will be determined by a valuer acting as an expert and not an arbitrator. Most leases will also oblige a tenant to provide the most recent two years’ trading figures at the end of the lease. This is a normal procedure to assist the landlord in marketing or valuing the motel for re-sale purposes. GST Since 2000, it has become vital for leases to include a GST recovery clause to ensure either party of the lease is not prejudiced by the imposition of this tax. Such a clause will also require the parties to be registered for GST. This is also a key criterion in enabling the motel to be sold as a going concern, relieving the need for the motel purchase price to have GST added to it.




Annexure 3: Right of Entry / Mortgages and Deeds of Consent

David Burrough, Hillhouse Burrough McKeown In most Leasehold Motel acquisitions, the purchaser offers a financier their interest in the lease as security. Generally, a mortgagee will require as a condition of finance approval that the mortgagee, tenant and landlord enter into agreement (usually called a Deed of Consent or Right of Entry document to ensure all parties recognise the other’s rights. The effect of a Right of Entry document is:

1. The landlord acknowledges that the financier is entitled to step in on the tenant’s default, under either the loan or the lease.

2. The financier may step into the tenant’s shoes for the purposes of rectifying any default, or just to run the motel generally and transfer the business to a new operator.

3. The landlord promised not to terminate the Motel Lease in the event the financiers takes any action against the tenant.

4. To require the landlord to give notice of any default to the financiers prior to terminating the lease.

5. To require the landlord to notify the financier in the event the lease is replaced or varied in certain respects.

Ideally, the financier will be placed in no higher or better position than the tenant. The financier is given the opportunity to protect its security. It will meet costs and ensure the landlord is satisfied with the performance of the tenant’s obligations under the lease. The biggest risk for a leasehold mortgagee is that the lease may be forfeited by the landlord due to a default of the tenant. A Right of Entry document attempts to overcome this concern and so enable financiers to continue to lend on the security of the lease. In practice, there can be difficulties in having the landlord sign the agreement. To help overcome this, we include in our motel lease a clause requiring the landlord to consent to a mortgage of the lease, provided the tenant satisfies the landlord that the proposed mortgage or charge would not prevent the tenant from praying the rent and outgoings. Our lease also requires the landlord to sign any documents the proposed mortgagee may reasonably require as a condition of granting the loan to the tenant. This will include a Deed of Consent / Right of Entry document. Such agreements are required in almost all circumstance where the financier does not have the security of real property, commonplace in the motel industry. Whilst the interests of landlord, lessee and freehold mortgagee may conflict, the parties should be able to resolve most issues in the Deed of Consent / Right of Entry document by common sense negotiation.




Annexure 4: Finance Insights

Mike Phipps, Mike Phipps Finance Leasehold Motels and Caravan Parks Purchase Costs & Equity Over allocating for costs and working capital has never sent a business broke. I’m pretty conservative when it comes to making these allowances so this month we are going to take a pessimistic look at costs and allocations associated with purchasing a leasehold motel. The same basic rules apply to leasehold caravan parks and indeed to many going concern businesses. Banks will generally lend 50% of the value of a leasehold. Many purchasers still look at the all up purchase price and provided they’ve got half plus a few bob they charge off and start making offers. It’s not quite that simple. Yes, you will need to come up with half the purchase price in equity, either via cash or by offering the bank supporting security such as a mortgage over your house. Remember that equity in your house is calculated as the value of the property x 80% less any current debt = available equity for business purposes. Next you need to decide if you are buying WIWO (walk in, walk out) or purchase price plus SAV (stock at valuation). Typically SAV will be capped at $5,000 but you need to allow for it. Now we come to the terms of the lease. At best you’ll need to allow for one month’s rent in advance so if the rent’s $110,000 per annum that’s an allowance of around $9,000. Some leases call for a rental bond that could be as high as three months’ rent. Your bank can provide this via a bank guarantee but you’ll need the cash or equity to secure that facility. Different states have different stamp duty costs and these can be substantial. For example, an $850,000 leasehold motel or park purchased in Queensland attracts stamp duty of around $30,000. The costs of any licences associated with serving alcohol or food need to be factored in with these costs best clarified via your lawyer. It would be usual to have an industry expert accountant review the financial records of the business and to have an expert lawyer review the lease. Factor in around $15,000 for these professional fees including searches. Bank fees will generally reflect .5% of the loan amount plus the cost of valuing the lease and any supporting security. A leasehold valuation can be a costly exercise so factor in around $3,000 plus GST. If the motel or park is a bit tired and the web site less that inspiring you may need to factor in a CAPEX (capital expenditure) and marketing budget. $10,000 doesn’t go far these days. Last but not least you’ll need a working capital budget. To some degree your allowance for WC will depend on the individual trading characteristics of the property you are planning to buy. Settle on a motel in Bathurst the week before the famous motor race or in Tamworth just before the music festival and chances are you’ll make enough money straight up to cover future WC requirements. However, this sort of fortuitous timing is relatively rare so best to have your accountant do up a cash flow budget and plan your WC requirements accordingly. As a minimum I would expect an allowance equivalent to one months fixed costs. Here’s how those numbers look in summary: • $850,000 purchase price WIWO




• Stamp Duty $30,000 (Qld) • Professional Fees and Searches $15,000 • Bank Fees and Valuations $6,000 • One Month Rent in Advance $9,000 • Capex and Working Capital Allowance $25,000 • Total all up purchase including costs and allocations $935,000

As you can see the allocation for all up costs and capital is 10% of the purchase price. Not an exact science but not a bad rule of thumb when making initial enquiries about a particular lease. Motel and caravan park leases generally show quite high return on investment numbers so it’s sometimes possible to go into one while flying by the seat of your pants in terms of capital. The problem is that if there’s some unexpected cash flow turbulence the landing can be rough. Best to take off with a full tank of fuel and hopefully not need to use it all. Until next time, happy hunting. Business Plans and Cash Flows Explained In the lead up to the GFC if you were upright and breathing and had a deposit you could borrow money. The banks were very excited about the way things were going and not a lot of attention was paid to the capacity of the borrower to successfully operate the asset being purchased. After all, the economy was going gang busters, the miners were having a great old time, what could possibly go wrong? My, how things have changed! The past few years have seen a steady tightening of credit policy among the banks with particular focus on new entrants to business with management rights and motels no exception. In fact, some banks will simply not lend to first timers regardless of how much deposit they have. Others are insisting on past experience and/or qualifications in a similar type of business. Most lenders are now enforcing a need for the dreaded business plan and cash flow in support of credit applications, particularly for motels and caravan parks. Never fear, it’s not as bad as most people think. In fact, done correctly business plans and cash flow projections can actually be fantastic business tools. Let’s start with business plans. There are numerous templates and guides available on line and frankly most of them look horrible to me. A business plan should be a pretty simple document and certainly not one full of motherhood statements and vague suggestions around wonderful guest experiences and the like. For me, a business plan starts by asking some key questions and then answering them. Typically, these will be the same questions you’ve asked yourself when making the decision to purchase. They include things like:




• What attracted me to this business in the first place?

• How is the business operating at the moment?

• Why are clients spending their money here? If they are not, why not?

• How am I going to maintain current performance if things are going well or improve performance if things are not going well?

• What is my fall-back position if my plans fail?

• Can the business be improved and how?

• Do occupancy rates and tariffs seem about right or is there room for improvement? Who are my competitors and how can I steal some of their business?

• What’s on the horizon that might present an opportunity or a threat?

• Do I have any regular clients, why do they stay and what happens if they stop coming?

• Are my key staff happy and reliable? Who are they?

• When am I going to be really busy or a bit quiet and how will I manage the business to cope?

• Do I need to invest money in equipment and capital items to maintain my standards and retain guests? If so, what and when?

• Will I have to promote the business and if so, how? What advertising and promotion is the current owner doing?

• Am I getting lots of business from third party channels? If so, what’s our web site like and how can we connect with more guests directly?

• Have I sought advice from industry experts and if so, who? What did they think about the venture?

• If things don’t go to plan who are my support team and where will I go for advice and guidance?

This is certainly not an exhaustive list and there will be questions peculiar to your specific purchase but it’s a good place to start. Once you have answered these questions the outcomes pretty much become the assumptions that drive your cash flow forecast. We see cash flows from time to time with no assumptions. This is a bit like trying to read a map with no towns on it. You have a vague idea where you’re going but no idea if you’ve arrived. Assumptions are pretty simple. They are the core operating metrics that will result in the cash flow you are forecasting. If you have a motel in a town with a big event each year you can assume 100% occupancy at a tariff say twice the yearly average for that week. That’s an assumption. If you are operating a holiday building on the Gold Coast you can assume peak season tariffs and 95% to 100% occupancy over Xmas. That’s an assumption. The council are planning to widen the road out front and potentially disrupt your business for 2 months. Occupancy may fall but you might also get the contractors to stay. That’s an




assumption. You have a motel lease with the rent linked to CPI, it’s going up every year, that’s an assumption. You get the picture. We recommend developing your cash flow forecast in conjunction with your accountant. The first 12 months will include your cash contribution and the bank loan/s as a starting balance and reflect your purchase price, costs and any preliminary expenses you are planning to incur as well as the day to day operating income and expenses of the business. I see a lot of cash flows that are what we term as flat line. That is, every month is the same. In the real world business simply isn’t like that so be sure to take into account specific operating dynamics on a month to month basis. This includes things like BAS payments and tax payments. I am also a fan of having a below the line personal cash flow that takes up all your personal expenses to give you a net cash position each month. We run a dynamic cash flow for our business that includes both personal and business expenses and also allows for future expected taxation and BAS liabilities. When we receive a bill we pay it and update the cash flow with the amount and timing of the bill. We do the same as our expected revenue changes. That way we keep track of costs and income as they change and we don’t get any nasty surprises. We also find it useful to use the cell based notes function in Excel to make notes about particular income and expense items. At my age it’s just too easy to forget otherwise and this saves me having to go back over countless files looking for a clarifying document. All of this takes a little discipline but I suspect people who track their cash flows sleep better than those who simply pray that all will be well. Even if your projections don’t always provide good news at least you can be prepared. Deal Killers: Have We Beaten The Fatal 5? Back in 2011 I wrote about experiences we were having that resulted in transactions not proceeding. We identified what we referred to as the Fatal 5 and introduced the article at the time with the following quote and comment: The contemporary form of Murphy's Law goes back as far as 1952, as an epigraph to a mountaineering book by Jack Sack, who described it as an "ancient mountaineering adage": “Anything that can possibly go wrong, does” May I suggest that in terms of some management rights and motel transactions: Murphy was an optimist! So how are things looking in these enlightened times? Let me tell you, nothing much has changed and in fact I reckon the challenges that present themselves in the course of a deal are actually getting more complicated. Let’s look at the key issues we encounter at the moment:




Pre-Qualification: We still run into potential accommodation industry purchasers who have only a limited idea of how much they can afford to spend. Prudent industry professionals know that the first step in the purchase process is to ensure that the intending purchaser can afford to undertake the planned venture. This pre-qualification process should not take the form of a simple equity calculation but should be a reasonably detailed analysis of the purchaser’s financial position combined with a critical look at the likely avenues for raising debt finance via the various lenders. Anything less is a step on the path to that first speed bump. What Is Being Sold?: Sales agents are a source of many of our best referrals so far be it for me to bite the hand that feeds, but perhaps just a little nibble! I’ve raised this in the past and it’s still a bit of a problem. While a number of sales agencies have really stepped up in terms of listing information and supporting research I simply don’t believe some accommodation businesses are marketed with sufficient detailed information about the asset. Experience suggests that in some cases purchasers have been presented with a summary of the asset being marketed, have made an offer in good faith only to discover that all is not as it seems. In some cases the sales agent could not have known and in others I suspect that the vendor may have overlooked certain matters. In a minority of cases I believe the agent simply didn’t dig deep enough when taking on the listing. The result is generally the same. The purchaser, already doing what purchasers do and wondering if they’ve made the right decision, is completely spooked by the revelation that things are not as originally presented. In many cases this triggers a renegotiation at best and a failed contract at worst. My advice when listing, get as much data as possible up front including copies of agreements, detailed letting pool and unit ownership data, BC minutes, independent accountant’s report and, if possible, a valuation of the manager’s unit. I am not suggesting that all these documents be given to a buyer, just that they be available to ensure the accuracy of the listing. Let’s face it, we are not selling and financing fish and chip shops, these are often seriously big businesses deserving of sophisticated and in-depth listing information. Educated Buyers and The Process: I know that buyers are now more educated than ever and for the most part that’s a good thing. With every man and his or her dog running seminars and education options available via ARAMA and the private training companies there’s plenty of information out there for the new industry entrant. Trouble is, in some cases a little bit of knowledge can be a dangerous thing. We are seeing a trend where some buyers attempt to almost conduct their own mini due diligence when looking at a property and in some cases simply confusing themselves or coming to incorrect conclusions.




There is a tried and true process for acquiring management rights, motels and other accommodation businesses. The process has been around for a long time and it works. While we encourage our clients to do as much research as they like the fact is that they need to stick to the process and we as industry professionals need to ensure that this happens. Sadly, in some cases you can lead a horse to water……… Inexperienced Advisors: These fall into two categories. The first is well known to all of us. It’s the lawyer, accountant, lender or financial advisor with no clue who thinks that management rights or motel leasehold is no different to any other type of commercial transaction. Thankfully the instance of potential purchasers ignoring advice in terms of using industry expert professionals is minimal. The more concerning situation is that of accommodation industry professionals straying outside their areas of expertise. I’m surprised at the number of purchasers we have worked with who’ve indicated a desire for a particular loan structure and debt product based on flawed banking and finance advice from their agent, accountant or lawyer. I am also surprised by the misinformation and confusion sometimes created when buyers receive banking and credit policy advice from people outside the finance process. When industry professionals stray from areas of specific expertise it just confuses the purchaser and creates doubt. I’m a great believer in sticking to the knitting, so to speak. Buyer’s Remorse: According to Wikipedia, buyer's remorse is the sense of regret after having made a purchase. It is frequently associated with the purchase of big-ticket items such as a car or house. It may stem from a sense of not wishing to be wrong, of guilt over extravagance, or of suspecting having been "snowed" by a sales associate. The anxiety may be rooted in various factors, such as: the person's concern they purchased the wrong product, purchased for a bad price, purchased instead of waiting for a newer model, purchased in an ethically unsound way, purchased on credit, or purchased something that would not be acceptable to others. In the phase before purchasing, a prospective buyer often feels positive emotions associated with a purchase (desire, a sense of heightened possibilities, and an anticipation of the enjoyment that will accompany using the product, for example); afterwards, having made the purchase, they are more fully able to experience the negative aspects: all the opportunity costs of the purchase, and a reduction in purchasing power. If we consider this outline of buyer’s remorse in the context of the first 4 Deal Killers in the Fatal 5 it’s pretty obvious how to minimize the risk of a purchaser getting cold feet. Simply ensure that the process is well managed and professional with no nasty surprises along the way. Of course, if a purchaser simply has a change of heart it should always be OK for that party to walk away with no regrets or recriminations. Life’s too short for regrets. In closing I would like to make a few observations in respect of the purchase process and a number of key things I have noticed since the original Deal Killer article 6 years ago. The first is that the key




industry professionals in law and accounting have never been better to deal with or more well organized in terms of supporting new entrants, explaining the process, providing information and acting in a co-operative manner. I see many giving their time to new entrants and they are to be commended for doing so. The level of support we see clients receiving, particularly when preparing for assignment meetings, is really encouraging. Secondly, the level of professionalism within the sales process has certainly stepped up over the last few years with many agencies now presenting listings in an extremely professional and well researched manner. Recently I saw an agency list a management rights which had NRAS units. They provided potential buyers with a complete history, explanation and analysis of the NRA Scheme in a really transparent manner. Needless to say buyer concerns were put to rest and I believe that property is under contract. Lastly, and to no great surprise, the banks continue to range from great to truly terrible in terms of reliability, timeliness and service delivery. We have just put on another experienced banker whose job is almost solely to monitor transactions and keep the banks on task. Talk about the hospital pass! Mike Phipps F Fin Director | Phippsfin Pty Ltd ACN 139 124 673




Annexure 5: Industry Averages and Ratios Ballpark / Industry Averages • In General Terms, based on Industry Averages, operating costs of a Freehold Motel (ie before

Rent) vary between 40% and 60% depending on the percentage of Food & Beverage revenue in Turnover.

• A Bed & Breakfast Motel with no Restaurant revenue on average will have a Freehold Net Profit Ratio to Turnover of 60%.

• A Motel with a large Restaurant component (say 1/3 of Income), on average will have a Freehold Net Profit Ratio to Turnover of 40%.

How Industry Operating Cost Averages Can Vary Freehold Profit Ratios can vary from the high 60’s to the low 30’s depending on: • The Breakup of the Food & Beverage component in Sales/Turnover • The size of the Motel – smaller Motel, higher Ratio – owners tend to do the bulk of the work

themselves • The Tariffs – a strong Tariff is far more profitable than a weak tariff say $140 as compared to

$85; • Long Term stays – these enable substantial savings in housekeeping; • New or Old Property, Grounds and required level of Repairs, Maintenance & Replacements; • Chain Affiliation Fees; eg Best Western or Choice can have substantial fees • Energy efficiency – eg Solar Panels. – reduces Electricity costs Rents Rent should be no more than 45% of the adjusted Freehold Net Profit. If the Rent Ratio is “out of kilter” it doesn’t mean that the property doesn’t present an opportunity for you. If you are confident that you can improve the Turnover and bring the Rent back to an acceptable ratio, it will be a chance for you to gain. You will buy the property on a better return than if the Rent was in line with Industry averages and sell at the normal return once you’ve improved the property.




Annexure 6: Glossary of Industry Terms FREEHOLD: Ownership of the Land, Buildings and Business. Generally called an “Operational Freehold” as the owner owns the land & buildings as well as operating the Business. Shouldn’t be confused with an Investment (sometimes referred as a Passive Investment), where the land and buildings a Leased out (rented) to a third party who operates the Business. LEASEHOLD: A Leasee (tenant) owns and operates the Business and has a right to occupy the land and buildings from a Leasor (Landlord) for a fixed term and subject to the terms and conditions of the lease agreement, which includes a Rental payment. ADDBACKS: Those private or unusual expenses in the Accounts that are added back to the Accounts Net Profit to give an “Adjusted Net Profit” figure. They are designed to give an expected Industry based Net Profit figure for a working ownership couple, before they pay themselves, their Mortgage Interest and Tax. They standardise or normalise the Business expenses over the year, based on Industry expectations. Typical “Addbacks” are Depreciation, Mortgage Interest, Owners Wages, owners Superannuation, excessive Repairs Maintenance and Replacements, excessive Motor Vehicle expenses, excessive wages (based on a working couple). COLLATERAL: Other assets that they use as security to satisfy a financier's criteria. Should there be a default the lender can seize those other assets to satisfy the debt. APPORTIONMENT: The splitting up of the sale price into its various components of goodwill, goods and chattels and land is called the apportionment. We strongly recommend an unapportioned Contract price, ie a single Contract price (other than a split where a Freehold Property is being sold under 2 Contracts – Land & Business), which allows you to bring in a Quantity Surveyor and revalue your Fixtures & Fittings for Depreciation purposes. CONDITIONAL CONTRACT OR APPROVAL: A Contract that exchanges subject to certain conditions being met eg Accountant Due Diligence of provision of Finance to the buyer. A Contract becomes Unconditional when these conditions have been met. There will be a definite time limit to an Unconditional Contract, usually 28 days. GOODS AND CHATTELS: These are the moveable items that are sold as part of a business or a motel. Eg Beds, TV’s, Washing Machines STOCKTAKE: A count of consumable items (food & beverage items, laundry detergents, guest amenities, linen if hired etc) which takes place on Settlement day. The value of Stock is usually in addition to the purchase price of the property and is calculated at cost price. INVENTORY: List of Goods & Chattels/Fixtures & Fittings that are included in the Sale. Eg Beds, TV’s, Fridges, kitchen appliances, etc. MOTEL/CVP SPLIT: Operational Freehold is divided into a Leasehold operation (Tenant) and a Passive Investment (Landlord)

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