One aspect of a motel business which is very important and often asked about is that of the Rent Review.
All motel businesses which are operated under a lease will pay a rental to the lessor and this will be reviewed on a regular basis. This does not necessarily mean that the rent will be increased but gives the lessor the opportunity to review the current rental being paid.
In the rental situation it is human nature that the lessor will be wanting to get the highest possible rent as a return on his investment and the lessee will be wanting to pay the lowest possible rent and thus be getting the highest return on his investment. It is essential then that to prevent too many arguments the whole process of this review is detailed in the lease document and each party is required to abide by their obligations under this.
The lease will stipulate the frequency of the reviews, the requirements of both parties during the review process and the remedies available to each party should they not be able to agree on a rental.
The most common period for a rent review is on a two yearly basis. A new lease for a new motel complex may have an initial rental which is set to allow for the building up of the new business and clientele. This initial rental may be reviewed after 12 months but then once established the rent reviews are generally on a two yearly basis.
Rent reviews are normally based on market conditions and current rents being achieved in motels of a comparable size and standard. Some rentals however under the terms of the lease are indexed to the CPI and this will give the percentage increase for each rent review. There are arguments for and against each type of approach. It is almost impossible to find two identical motels to compare rents so often it is necessary to make adjustments for individual features or locations of each motel. The question then becomes how are these adjustments assessed and evaluated. The CPI indexed rental can be exposed to products within the CPI which have little or no bearing on the ability of the motel to earn income and thus can set an unrealistic rental.
In the past, it was always a standard term of leases that a ratchet clause would be incorporated in the lease document. In layman’s terms a ratchet clause means that the rental set at each review sets the minimum amount which can be payable on the next review. Basically the rent can always go up but can never go down.
There has been a move in present times to have a limitation placed on the ratchet clause. It is now more common for an initial rental to be set and on any review the rent can be reduced, but will never be reduced below the original rental set.
Rental reviews are a matter of negotiation between the parties in accordance with the terms of the lease. The lessor needs to give notice that a rent review will take place in accordance with the required timeframe and often will assess a new rental and advise the lessee of that amount. Should the lessee object, they need to inform the lessor and try to convince the lessor that the rent should be at a different level to that which the lessor is requesting. If agreement can still not be reached then valuers are employed to assess a reasonable figure and often that is the end of the matter.
There are of course cases where agreement can still not be reached and mediation or arbitration must occur. The procedure for this is also often stated in the terms of the lease and makes the process transparent. This is however a costly exercise and one where there will always be a winner and a loser. This can create negative feelings between the parties and potentially destroy an otherwise good lessor/lessee relationship.
The big factor to remember in the motel business is that both the lessor and the lessee have a partnership type relationship. One can not succeed without the other. In order to build and cement this relationship the lessee should endeavour to inform the lessor of everything they have done to the motel. They should send an e-mail or give the lessor a call and tell them that they have just painted the rooms and they look great or they have redone the garden or bought new couches. The lessor will be more likely to be amenable if he is aware of the things the lessee is doing to put money back in to the motel and how well they are looking after his asset.
The other element to a rent review is that it is a two way negotiation. It is not just a matter of agreeing to either leave the rent as it currently is or increase it but can be a way of achieving things from the landlord in return. For example a lessee may wish to have more years on the lease term. This is an ideal opportunity to agree to an increase in rental in return for an extension on the lease. Another scenario may be work required around the motel. A rent increase can be agreed to and in return the lessor agrees to resurface the bench tops in the units or upgrade the bathrooms. The best result from a rent review is a win/win situation where the relationship between the parties is maintained and everyone is happy.
http://voices.realestate.co.nz/motels/2008/09/23/the-rent-review-part-of-the-motel-lease/
