Leaseback Income and How The Cat is Skinned

Leaseback Income and How The Cat is Skinned

Within Short-Term Letting MLR businesses, the leasing back of a unit, from the Owner at an agreed monthly/annual rental is once again back in favour.

However the popularity only extends to those businesses that are performing well with consistent and steady occupancies.  At the time of writing, this principally applies to Corporate Let accommodation properties primarily based within the CBDs of Brisbane, Sydney and to some degree in Melbourne.

It was, in years past, popular in coastal based Holiday complexes, but diminishing occupancies and tariffs have not underpinned the viability of Leasing Back units as the return to the Operator can be less than the agreed rental.  i.e. a loss making situation.

In the Valuation process there are several approaches to the market value assessment of the Leaseback Component (LBC)of the business, which are:-

  • Identifying the Risk Profit component arising from the LBC and applying a different and lesser multiplier to that figure.
  • Establishing the ‘get-out’ term within the Leaseback Agreement and to then apply an appropriate multiplier that reflects the level of risk.

It is the case that some Leaseback Agreements can be terminated by either the Owner or the Operator with 90 days notice, similar to the standard Qld PAMD Form 20a agreements, hence the question is ‘how much more risk is there?’

Others however have one year fixed terms or longer.

To we as Valuers, and to our Banking Clients, these are the Agreements and MLR Businesses that are viewed as carrying the highest risk component.

This is so, as all markets change and whilst recent years have had seen unbelievable room occupancies, it may not be that way always.  There-in lies the risk, falling occupancies, falling tariffs but an ongoing contractual agreement that is not going away anytime soon….

We do see, from time to time, Leasebacks running at a loss and with the Operator not nipping this loss in the bud.  We can only assume that this may be due to the fear of losing or upsetting an Owner?

What I can say is that each MLR Business that has some level of Leaseback units within the letting pool will be different from the last one and the next one that we assess.

Therefore they all need a bit of individual consideration and investigation so as to establish the risk level and in-turn determine how it should be treated.