Motel Finance

Financing the Motel Freehold

Do you…

 

  • Own the leasehold and want to buy the freehold?

  • Wish to buy or refinance a free-hold going concern?

  • Plan to refurbish?

  • Want to free up some of your equity?

 

If so, here are some pointers on raising debt finance.


Banks and non-bank mortgage lenders are usually the first port of call for motel finance. Lending criteria, appetite and industry knowledge can vary so, as with any other service provider, it is worth taking the time to identify a lender who truly understands the motel business and is comfortable assessing these types of transactions.


For example, many lenders prefer to lend only against the motel freehold (land and buildings). They ascribe no value to the operation itself when determining the level to which they are prepared to lend.

Other lenders, including Portfolio Mortgage Company, acknowledge the value inherent in the operation and are willing to consider proposals to lend against the entire free-hold going concern value.

This may, in some cases, enable a motelier to borrow a greater proportion of the purchase price. It is of particular assistance to people who already own the leasehold interest, as these lenders will allow the value of that leasehold interest to be counted toward the 'equity contribution' for the purchase of the free-hold. The owner will therefore not need to provide such a large cash deposit.

Having identified a preferred lender (or lenders), the next step is to gather together the information required by the lender. This will typically include:

  • The amount of the loan you are seeking and whether you wish to make regular principal repayments (note that some lenders insist on principal repayments while others make a case by case assessment and, in some situations, may not require any principal until the date the loan expires);
  • Sale and purchase agreement for the motel asset being acquired (free-hold going concern or free-hold);
  • Valuation report prepared by a reputable and experienced motel valuer acceptable to your lender.
  • Where possible check with your lender before appointing a valuer, as having to get a second valuation done to satisfy a lender costs time and could delay the process by several weeks if the valuer has a busy workload. Check also whether your lender has any specific requirements. For example a lender willing to lend against the leasehold as well as the freehold interest will require that the valuation be done on the total freehold going concern. Note also that the valuation process need not just be an exercise in satisfying the lender as a valuer with specific motel industry valuation expertise can also be an excellent source of independent advice and information for the motelier;
  • Historical financial accounts;
  • Cash flow projections;
  • Personal statements of position;
  • Copy of the lease (if applicable);
  • Experience of the operators. This need not be local or even in the motel industry, but proven experience in a service industry for at least one of the operators gives lenders reassurance that the motelier understands the operation of a customer service-oriented business. In addition, accounting, book-keeping or finance experience may also be regarded favourably.

Lenders, being lenders, will of course be assessing all of this information against their internal industry and lending criteria. These typically include the following:

  • A maximum loan to security value ratio. This is usually 60% to 65% of either the total free-hold going concern or just the free-hold, depending on the lender and the relevant motel's location and other characteristics;
  • A minimum interest cost cover ratio. This ratio varies among lenders but an example is "annual earnings before interest, tax and depreciation divided by the annual interest cost to be not less than 1.75 times".
  • Are revenues, costs etc in line with market norms?
  • Is the yield where it should be? In this regard, it is worth noting that motels with fewer rooms may show a poorer yield simply because the manager's residence comprises a bigger proportion of the total value.

A loan proposal which does not quite fit lending criteria in one respect may still be bankable if there are sufficiently strong mitigants.

A lender will typically seek the following as security for any loan:

  • first mortgage over the freehold title
  • first mortgage over the lease (if registered) or assignment over the lease (if not registered)
  • personal guarantees, if the borrower is a company
  • general security agreement over the assets of the borrower, if it is a company (the general security agreement has replaced the concept of the debenture)

All going well, you will (hopefully promptly) receive an acceptable letter of offer from your preferred lender. Even if the lender's response is not as you had hoped, the lender should usually be able to assist you to move toward a Plan B. The two key pieces of information you should be seeking in this regard are:

a) what do I need to do differently to get the loan I am seeking? (for example, would more equity, a second ranking loan from the vendor or a new lease make a difference?)

b) If you still do not wish to lend me the funds, can you suggest another lender whose lending criteria might better accommodate my business?

Lenders are usually very happy to provide advice at any stage in the process, be it the preliminary stage of researching potential purchases etc or at the point of having an immediate financing need due to a pending contract. As we have highlighted, lenders do differ in their approach so it may be useful to seek the views of a variety of potential lenders.

If the early feedback from a number of lenders is not encouraging the most prudent course may be to review the risks of the proposal and look at other alternatives, for example finding a suitable equity partner or making the next step a different (perhaps smaller) business. Given today's yields not all deals can be done at sufficiently low interest rates to make them work. But it is a competitive market among lenders too, which should ensure that genuine borrowers will find lenders more than willing to provide feedback and offer solutions to their funding issues.

This article was prepared by the directors of Portfolio Mortgage Company, a first mortgage lender specialising in commercial property finance including motel freeholds and freehold going concerns.

This article was first published in the MANZ Bulletin, the quarterly newsletter of the Motel Association of New Zealand (MANZ). Portfolio Mortgage Company is an allied member of MANZ.

For further information on this topic, or to discuss any commercial lending proposal please contact Portfolio Mortgage Company Director Jennie Walsh (09 920 4903)

Establishment fees apply to all succesful borrowers with verified Yourbiz members qualifying for a $500-00 discount.