Motel & Caravan - Frequently Asked Questions 79

01.        I’ve had no previous experience running a park or motel. Can I apply for finance?

You certainly can. Part of our process is to present your transaction to lenders in the most positive way possible. A great business plan with cash flow forecasts and a detailed CV will help enormously. Ensuring you surround yourself with industry expert advisors and having a reasonable financial position are also great strategies.

Can’t I just use my family lawyer and accountant?

You certainly can. But unless they have specific expertise in these types of transactions and this asset class, we recommend you engage industry experts. In many cases those experts are recognised by the banks and the outcome of their work will be highly regarded by your lender.

02.       How much can I borrow?

Generally, up to 50% for leaseholds and 65% for freehold going concerns and investment only purchases. You can also borrow up to 80% of residential real estate assets less what you owe. If you have sufficient equity in real estate but no cash, it’s possible to borrow the lot. Of course, with increased borrowings we have to make sure the debt servicing numbers work.

03.       How much money do I need on top of my deposit?

We recommend at least 10% of your purchase price. This allows for purchase costs, stamp duty (if applicable) and working capital. As an example, for a leasehold that means having 60% of the purchase price. We have detailed some specific cost areas in the breakout box.

• Purchase price
• Stock
• Rent in advance adjustments
• Stamp Duty
• Legal and accounting due diligence
• Finance costs
• Valuation costs
• Licencing
• Deed of Consent costs
• Working capital allowance (not a cost but needs to be allowed for)

A word on stamp duty*

In relation to average stamp duty for a motel lease purchase, every state is quite different, so we have set out below each state/territory separately based on an approximate average purchase price of $1,000,000:

1. QLD: $38,025;
2. NSW: No duty payable on goodwill and each party may apportion the purchase price between goodwill and plant/equipment at their own discretion. Most of our clients apportion the purchase price 50/50, in which case stamp duty would be $17,590;
3. VIC: NIL;
4. WA: $42,615.50;
5. NT: $49,500;
6. ACT: NIL;
7. SA: NIL;
8. TAS: Similar to NSW, no duty is payable on the business sale alone, but duty is payable on ‘goods’ transferred as part of the arrangement where there is an interest in land (i.e. a lease). Assuming the amount apportioned towards the ‘goods’ is 50% of the purchase price, then stamp duty would be $18,247.50.

*This information courtesy of industry experts Pevy Lawyers.

04.       How do I work out my maximum purchase price?

We can do this for you. But if you want to do a quick calculation it’s pretty simple. We’ve provided an example in the breakout box. It assumes you have a house you are going to keep.

Cash $250,000

House $800,000 x 80% = $640,000

less current mortgage $210,000 leaves $430,000

Total available $680,000

Divide total available by 60 and multiply by 100 to give you a maximum leasehold purchase price of $1,133,000. This calculation allows for purchase costs and a working capital allowance.

05.       What about loan repayments?

Good question. Because every deal is different, and everyone has individual circumstances it’s not possible to provide generic debt servicing numbers. However, if you find a property you are interested in, we will tailor a debt servicing scenario to your individual circumstances. No obligation, no fees.

06.       What will the bank want as security?

Your lender will take a charge over the lease and a first mortgage over any supporting real estate security. With lease finance the lender will want a Deed of Consent and Right Of Entry. If you are buying a freehold the lender will take a mortgage. Your personal guarantee will also be required.

07.       Can I get interest only finance?

If you are borrowing 50% for a lease, then the debt secured by that lease will usually be on repayments over 10 years. Additional debt secured by real estate can usually have an interest only option.

08.       Can I use my super fund?

Short answer. If you want to borrow money…. No. There are some limited circumstances where you may be able to acquire a freehold (just the real estate) in a SMSF so best to chat to us first if that’s your plan.

09.       How do I know a good opportunity from a risky one?

All going concern businesses have risk. Our job is to review any purchase you are considering and where possible point out the good, the bad and the ugly. We have a duty of care to do so. Of course, if the price is right taking a well-judged risk may not be a bad idea.

10.       What should I expect from the agent?

Hopefully you will be dealing with an industry expert agent. In fact, many agents have also owned and operated accommodation businesses and can be a very valuable source of information. Your agent should provide a Sales Information Memorandum describing the property and containing all the pertinent information you will need to assess the opportunity. You should also be provided with accountant prepared Profit and Loss Statements.

11.       Is the price negotiable?

Maybe. It doesn’t hurt to ask. If you want an idea of what to offer, we are happy to provide market data, but we won’t tell you what to pay.

12.       How are these businesses valued?

Like all businesses motels and caravan parks are valued on a range of variables. However, central to the value will be the sustainable net profit or, in the case of a passive freehold investment, the rent. In all cases valuers will apply a yield to the net income. That’s essentially a percentage return that they believe reflects the market and the risk in the specific business.

For example, let’s assume a leasehold motel in an attractive geographic location with a 25-year lease and a net profit of $425,000. Let’s also assume a market average yield or capitalisation rate of 30%.

$425,000 divided by 30% x 100 = $1,416,000

It’s important to appreciate that yields vary and the higher the risk the higher the yield. It’s simple risk and return. A good example is a short lease. If our example lease was 10 years instead of 25, we’d expect the yield to rise accordingly with the result of a lower price.

$425,000 divided by 40% x 100 = $1,062,500

Banks will lend on short leases albeit the loan term will also be pretty short. As such repayments will be higher, but this is balanced by a lower purchase price for a substantial net profit.

13.       When I buy a lease, what exactly am I buying?

In essence you are buying a right to operate a business. Your rights and obligations are detailed in the lease. You are also buying the chattels associated with the operation of the leasehold business. A good way to think about this is to imagine you could pick the motel up, turn it upside down and give it a good shake. Everything that falls out is yours. Anything that doesn’t is owned by the landlord.

14.       Do I need a licence?

Licences are only required if you are serving liquor or preparing food on site. Consult your lawyer for more information.

15.       Can I extend the lease?

You sure can. The industry standard is to purchase more years on the lease via a payment to the landlord. This can be a cash payment, or it may be an agreement for the lessee to make improvements to the property. For example, a lessee may offer to refurbish bathrooms in exchange for a lease extension. This benefits both operator and landlord as the operator has better rooms to sell and the landlord has a property with improved amenities. It’s a win-win.

Witten by

Mike Phipps

Mobile. 0448 813 090    Email. mike@mikephippsfinance.com.au