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Leasehold Valuations

5 Key Areas to Consider for Building Value in Your Leasehold Business.



When valuing a leasehold asset such as a motel, resort, or accommodation-style business, several crucial factors come into play.These factors include the strength of the lease, rental costs, the condition of the buildings or improvements, and, of course, the annual profits.

The leasehold opportunity, depending on how well these areas align, can hold significant value.


Term of the Lease



If you want to enhance the value of your leasehold business, it is important to have a reasonable lease term, typically ranging from 15 to 25 years, depending on the property. Additionally, it is crucial to consider any restrictions on borrowing against the lease. Keep in mind that many lenders require a minimum lease term of 20 years. Therefore, having the option to extend the lease term within this period can be advantageous.


Terms of the Lease



When considering a lease, it's important to go beyond just the term. You'll need a lease that allows you to assign (sell) the lease, make necessary repairs, and make potential improvements to the property. It's also crucial to determine who is responsible for reasonable outgoings and expenses.

Many leases contain hidden clauses that require the leasehold operator to refit carpets, kitchens, and common areas every 5 years. You should consider this while calculating your profit and loss.

Additionally, other factors to consider include your fixed and non-fixed outgoings, air conditioning, insurance, council costs, security, and fire systems.

Buildings and Improvements


In addition to the lease terms mentioned above, it is important to assess the condition of the buildings and anticipate potential expenses throughout the lease term. Additionally, it is crucial to determine who will be responsible for covering these expenses. For instance, you should clarify whether the landlord or the leasehold owner will be responsible for paying for improvements. This factor can significantly impact the value of your leasehold business.

Annual Rent & Outgoings


There are several ways to determine whether the rent is too high. However, it is generally recommended that the rent not exceed 50% of the nett profit, unless there is a clear demonstration of how the profit can be improved in the medium term. Another factor to consider is the profit-to-rent margin. For example, a low profit of $300,000 with a rental of $150,000 is considered very high. On the other hand, if the profit is $1 million and the rental is $500,000, there is more flexibility. In some cases, the rental may even exceed 50% in the short term.

Annual Profit from the Operating Business

Considering all of the above points, you can now apply a value to the leasehold business using the annual profits of the operating business.

The operating business generates an annual profit from the use of its premises. This profit may include the wages of the owner or operator or an allowance for the same. For example, if the owner operator makes a $350,000 profit, it would be reasonable to apply a capitalisation rate of return between 25 and 30% or a leasehold value ranging from $1.167 million to $1.4 million. This takes into consideration all five points that have been covered.

If you need assistance with funding, planning, or selling your leasehold business, we can help.



Contact the Allbiz Deal Room team to prepare your listing  or the Allbiz Capital team, and we'll take care of everything.


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