Motel Mingle Forums Motel Valuations How do we value a Motel Leasehold?

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  • #1760

    Motel MingleMotel Mingle

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      What is the current  valuation method to determine what a motel leasehold is worth?

      Finding answers.        Sharing ideas.        Solving problems.

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      • #5523

        PaulPaul

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          Just another quick question on leasehold – is the lease holder expected to pay for things like the water rates and council rates?
          In a private rental situation, the tenant doesn’t pay water or council rates but what is the rule for lease holders in a motel? Just curious…..

        • #5381

          PaulPaul

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            Hold that thought! I’ve now got my head around ‘Yield’…..

            Based on my own example then;

            Turnover $600,000
            Nett Return (65%) EBITDA after add-backs and ammortisation = $390,000

            Freehold (12% yield) = $3,250,000 to buy

            Lease (28% yield) = $1,392,857 to buy the lease

            Rent should be around $138,000 p.a.

            Simple eh?

            Thanks for all your help!

          • #5248

            PaulPaul

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              How is the lease on a motel even valued? Is there a ‘rule of thumb’ formula based on turnover? What would a fair rent be after the lease has been bought? Again, is there a simple formula for working this out? Any thoughts welcomed….

              • #5291

                imageBallina Colonial Motel

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                  Paul hi, yes there are a few guidelines on this.

                  For a freehold going concern, the value would be based around the net profit adjusted for ‘add-backs’, known as the E.B.I.T.D.A. Brokers will tell you that the expected yield should be between 12-17%. The reality is that in the cities that yield could be as low as 9% and most country motels sell for about 12%. You expect the adjusted net profit to be about 65% turnover. Thus a turnover of say $250,000 has an EBITDA of say $165,000 and at 12% yield gives a value of about $1,375,000.

                  Leasehold works the same way, except that the expected yield would be between 25-35%. Most go for about 28%. Thus, using the same example as above, at a 28% yield, the value of the lease would be $590,000. This works where there is a 25-30 year lease in place, which is what the banks want to see. Thus the lease value reduces as the number of years decreases.

                  There are a few variables other than the profitability, such as location, condition of property and furnishings, demand etc.

                  In order to determine the rental for a leasehold business, we go back to the turnover figure. Rent would be between 21-25% of turnover. So, in our same example, say 23% of turnover would give us a rental of about $57,500 per annum.
                  So if you were an investor and bought a motel for $1,375,000. Then got back $590,000 from selling the lease, the rent of $57,500 would give you a gross return of 7.3%. Funny that! Brokers screw our values down by expecting a 12% + return, yet as an investor you would be happy with 7%!

                  • #5317

                    PaulPaul

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                      So, based on figures here;
                      Turnover approx = $600,000
                      Rental = $138,000 (based on 23% of T/O)
                      I’m not really understanding ‘yield’ or how the calculation was made in the above example (sorry for my ignorance). Could you explain; “Thus a turnover of say $250,000 has an EBITDA of say $165,000 and at 12% yield gives a value of about $1,375,000.”
                      I understand the 65% of T/O equates to the EBITDA, but how is the 12% yield figure arrived at? Is there a simple mathematical formula for that? Sorry for my misunderstanding!

                      (BTW, based on that calculation, the lease holder here is paying WAY too much rent!)

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