Motel Finance Australia

A freehold going concern is the simplest motel structure to finance. The buyer acquires the land, buildings, plant and business together, and the lender takes a first mortgage over the property plus a general security agreement over the business. Major banks and non-bank lenders commonly lend 50% to 65% of the going concern valuation, with the upper end reserved for larger towns, consistent profits and experienced operators. Loan terms of up to 15 years are common, some lenders offer longer, and interest only periods of a few years are often available. The guide to buying a business and the freehold together explains how the two parts are funded.

A leasehold motel is a business only. The buyer pays for goodwill, furniture and equipment, and the right to operate under a long lease from the freehold owner. New motel leases are commonly written for around 30 years, and the value of the business falls as the term runs down. Lenders often say they prefer 20 or more years remaining, and they will not set a loan term beyond the lease. Gearing is commonly 40% to 50% of the business valuation. Major banks are selective, non-bank lenders do much of this lending, and additional security over a home or other property is often required.

A passive freehold investment is the landlord's side of the same arrangement. The investor owns the land and buildings and collects rent from the motel operator under a long lease. Lenders assess it as a specialised leased commercial property and commonly lend up to around 65% LVR, subject to debt servicing. They look closely at whether the operator can afford the rent. An industry rule of thumb is that rent should sit below about half of the business's maintainable profit before rent. If the tenant fails, the landlord inherits a motel to run or re-let, so the operator's trading figures matter to the lender too.

Valuation is based on maintainable earnings. A specialist accommodation valuer reviews two to three years of trading, removes one-off income and costs, allows for an owner's wage or a management couple, and arrives at a maintainable net profit. That figure is capitalised at a yield drawn from comparable motel sales. Freehold going concerns sell on much lower yields than leaseholds, which is why a leasehold costs far less for the same profit. Occupancy, average room rate and RevPAR are compared with competing motels, and the valuer notes any capital expenditure needed to hold those numbers.

Serviceability is tested on the motel's maintainable profit, plus any other verified income, against all debt at an assessment rate above the actual rate. Lenders look for a clear margin of profit over interest and repayments, and they check how that margin holds in the quietest months. Seasonal motels may be given a working capital facility or repayments shaped around peak trade. First-time operators are usually asked for a business plan, evidence of relevant management experience and sometimes a vendor handover period. Motel lending is full documentation lending, and loans are commonly reviewed each year against updated financials.

Location is a credit issue in its own right. Many motels are in regional towns where the pool of buyers is small, so lenders think about how long a sale would take if the loan went wrong. Towns with diverse demand from corporate travellers, health services, government, events and tourism are preferred to towns that rely on one employer or one project. Highway bypasses, new competing rooms and the growth of short stay rentals are all considered. Some lenders restrict gearing by postcode or population, so the same motel can receive quite different offers from different lenders.

Costs and tax need early advice. Stamp duty applies to the property and, in some states, to business assets. The sale of a motel may qualify as a GST-free going concern if the conditions are met, and the page on how GST works when buying commercial property sets out the general position. Get accountant and legal advice on the contract, entity structure and lease. Exit options are a sale, a refinance once your own trading history is established, or for a freehold going concern, selling the business on a new lease and keeping the freehold as a passive investment.