Downside of long term lease?

http://www.realcommercial.com.au/property-hotel+leisure-nsw-parkes-501097147

As a principle I understand that long term leases are a good thing. In the advertised property, there is a 30 year lease. So surely this property must be an attractive proposition? For 1.9 mil it seems that the new owner can receive 170k indexed to CPI for the next thirty years - which makes 1.9 mil the price of financial freedom for me and many others.

The downsides as I see it:

1. Can the tenant really last for 30 years and honor a 30 year lease?

2. If the tenant goes bust 3 years down the track, you are left with a useless property in the middle of nowhere.

I would be grateful for your opinion on the downsides of the advertised property.
 
Parkes is hardly the middle of nowhere, although I do recollect that several years ago medicos from the University of Sydney regarded Richmond as being Western NSW.
 
Now, is that the treatment works in the same street? Phew!!!!


But seriously, the hotel is based on the Elvis theme - Parkes is the Elvis town with thousands rocking (ha ha) up for the Elvis Festival.

You would need to review the quality and track record of the tenant - what is their occupancy rate outside of holiday season, who is staying there eg business travellers, holiday makers, transients etc.

This would be right up Crest's alley.

As for the 30 year lease, the value is in the business - this will be assigned several times over the 30 years. Is the vendor the occupant? (That'll end in tears - for the purchaser, low growth, locked in reviews, no market reviews etc).
 
Thank you guys. I appreciate all the tips. The ad seems too good to be true in that you would think that all a sixty year old needs to do is to buy the place and then is set forever with a yearly income of 170k. No need to fiddle with a whole host of other investments.
 
Look at the other terms of the lease being offered. What security is their? Things like what level of rent is paid? Are their directors guarantees? How financially sound are the directors? I would assume that if the lease is assigned during the 30 year term, the original tenants (read also directors) remain liable? Is that correct? I just recently secured some $40,000 from the previous tenant, much to their dismay.
 
Parkes is a nice area, very "old" NSW so I think the hotel will stand the test of time from that perspective. Make sure to read the fineprint and do your due diligence and I'll think you might have stumbled on a very nice little package.
 
Hi china

This property could actually be a 50 year lease if the options are exercised - potentially without market rent reviews. It certainly appears to indicate that there is no rent review for the first 30 years anyway. The problem with a regressive lease like this is that it limits your upside and leaves you fully exposed on the downside.

Upside is limited by the lack of rental increases. If market rent values double over the next five years for any reason, you could be left subsidising the tenant's rent for the next twenty five years. That is a long time!

Downside is not limited though - if Parkes collapses as a town requiring this type of accommodation, then no-one will make money from renting this facility off you. The lease will be broken and you will be left holding the baby. It's not as if the tenant is likely to be credit worthy enough to secure 30 year debt with a bank (not many companies fall into that bucket, if any?).

In exchange for all this, you are being asked to stump up at what appears to be a reasonably attractive yield. But is the vendor also the tenant and playing with the figures? Is the rent currently reflective of the market in the area (is there any visibility of what the market in that area is like?)? Does the price reflect the approximate replacement cost? Lost of questions to ask.

For myself, I would be happy to accept a lower yield on a more conventional property in a capital city - there seems to be a reasonable amount to choose from at around 8-9% net at the moment. The problem is getting a decent length lease - the good circa five year leases to credit worthy counter parties seem to be going for pretty low yields these days. Risk is out of fashion again!
 
Hi China.
Scott's on the money.
Motel's not in main st. But TripAdvisor rates it 3rd out of 16 in Parkes. Reviews vary on room sizes, suggest u mystery shop it.
Is the lease current?
Who is the vendor - current landlord, current operator ?
If the lease has already commenced and you're considering buying from the current landlord, then you need to read the lease very carefully.
If it hasn't already started, then a 30+10+10 is an unnecessarily big and therefore suspicious carrot.
Hope the Elvis theme can be toned down for the other 50 weeks of the year, it's not everyone's favourite.
If the tenant bails in 3 years say, and the property is basically ok and functioning well as a motel, and provided the lease allows, then the landlord benefits by being able to re-enter and take possession and after paying out the tenant for goods n chattels etc at what is usually a low price, the landlord re-sells the lease again and usually makes a substantial profit from this exercise for his trouble. It's one of the rare occasions when a landlord usually benefits from a tenant default.
Unless the lease states otherwise (and the lease is more King here than Elvis) the landlord is usually only responsible for structure, so since it's already a reno, suggest you get a thorough building inspection done. Look at it on Google maps street view and you'll see what it was like pre-reno.
Personally I prefer main st/hwy motels as unbooked arrivals make up about 25% of bookings and that won't happen in the back streets. However, the place might rock on bookings through wotif and booking.com so worth a look.
Also worth noting that in assessing the risk, Banks rely heavily on the operator's CV, relevant business skills and financials as well as the motel figures etc. Outside of the Elvis Festival, competition is stiff in Parkes the rest of the year. Checkout the Station Motel, north end, position position.
Cheers
crest133
 
My company has a contract there and I stay there regularly, was there last week and my observations -

Old building, i believe it was a conference centre previously but I think from looking at the fire escape plan may have been built as school camp accommodation with dormitories and communal toilets (the upstairs wing is where we stay, there may be more conventional layouts elsewhere). Dorms have now been converted into separate motel rooms, which is where our company staff gets put up. While clean and tidy will be cramped once the "modern look" has worn off as one old dorm has been converted to 3 small rooms. Haven't stayed in any other rooms apart from these 3.

Parkes has plenty of demand for motels (at the moment). The place we stayed at until switching to grace lands was always booked out or close to it, lots of elec/gas/reps vehicles in driveway, grace lands doesn't seem as busy but the demand is their in the town. I agree with previous poster that the location isn't the best, it is in a residential area and you won't find it unless you know it's there. Our old motel was right in town, close to pubs/shops which is sought after for most big contracts.

The food and bar is good, but may be out of place? It's new so relatively busy but not sure if it would stand on its own over time without the rest of the hotel supporting it.

I know several other motels we stay with regularly in the central west have repeat business from bus tour groups which can pay very we'll, gracelands would be set up well for that market.

If I had the cash I'd be interested, but I'm wondering why the operator doesn't buy it (I assumed they had) instead of lease it??

Finally, the Elvis thing isn't overdone, it would attract more then it offends.


Hope this helps.
Alex
 
How does that compare with the standard yield for the hands off hotel lease? I would have thought that 9% was about standard from what Crest133 has said previously.
 
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