A number of recent sales have prompted me to express our opinion in
relation to the leasehold marketplace and determining rental and values:
Leasehold Hotels have their own separate marketplace.
There are a number of factors affecting the value of a leasehold hotel;
such as Term and Rental. Recent years have seen the "traditional" hotel
lease varied with bonded leases, high rent-no premium, 30 yr, 50 yr and
even perpetual lease terms.
Assets owned by the tenant vary occasionally and we have seen some
lease's where the tenant owns the Poker Machine Entitlements.
Variations from the "traditional" cause confusion in the market and can
lead to strange results.
With the tightening of bank lending criteria a number of lease purchasers
have had to down grade their expectations. Supply of leasehold properties
(particularly CBD Sydney) has increased as pressure is placed on a number
of lessees's to reduce their lending exposure and lower debt levels to
inside today's new lending parameters. Many of these leasehold properties
were freshly created in recent years and have rentals well outside
"traditional" levels which are causing them to be rejected by the market.
Latest results show that leasehold properties with rental, lease
terms and conditions and terms as expected in the "traditional" leasehold
marketplace are far more saleable than properties that are outside
Leasehold Value Calculation: Leasehold hotels are
traditionally valued by applying a rate to the Broker determined EBITDAE.
This rate is determined by many factors including term, rental, location,
business style etc.
TERM:Recent years have seen lease terms extended,
particularly with the introduction of corporate style landlords to the
marketplace. Today we are seeing many of the 20 + year leases terminated
where rentals were set unreasonably high and operators have not handled
changes to trade such as no-smoking.The traditional lease term has been
12 to 15 years - negotiated between the parties.
We recommend any extension of term above 15 years is added as a paid
option to the lease agreement. Experience has shown that this is the only
way that true premium value can be provided for terms in excess of 15
RENTAL:Hotel rentals have traditionally been determined
as a result of sales and profitability. One of the popular measures of
rental has been to apply a rate to each income stream. The rates below
are general and vary within income streams I.E a hotel with a walk-in
bottleshop generally has higher rental to sales % than hotel with liquor
barn, hotels with discount food generally attract lower rental to sales %
than hotels with well priced margin meals.
Rent % of Sales
Bottle 4% - 6%
Food 5% - 8%
TAB, Rents, ATM etc 12%
The "golden rule" still appears to be ---- Thou Shalt not pay
over 10% of total sales as rental!
A further method of assessing rental is in relation to Gross Profit.
Hotel Gross Profit x 1/6 = Rental
Rental can also be assessed in relation to net profit
Hotel Net Profit x 40% to 45% = Rental
Leasehold Premium: The lease premium pays for the goodwill and
tenants plant & equipment.Today we are seeing 2.0 to 2.2 x
the EBITDAE (earnings before interest, taxes, depreciation, amortisation
and exceptionals) profit after rental as the Lease premium.
The leasehold market place has been in a state of confusion with so many
variations from the "traditional" hotel lease. Conflicting "expert"
opinions and un-realistic expectations by landlords and lessee's have
seen a number of lessees walk away from their obligations.
The above is guide based on our experience. Varying factors may change
the opinions above. When purchasing a leasehold property please seek
legal advice from a recognised hotel specialist prior to executing any