As our first post in this series pointed out, whether to buy or lease your hostel is a question that consistently comes up on the Hostel Management forum, Facebook group, and in general conversation. To help our members better understand their options, we have created a series of posts with information to help.
There are many factors to consider when making this decision, and the first post went through the pros & cons of buying vs. leasing, as well as some specific factors to consider. If you haven’t read it yet, be sure to start there. This post is part 2 of 3, where we will discuss different types of leases, as well as change of use permits. Part 3 will include general points to consider from the actual experiences of Hostel Management members.
There are as many types of leases as there are hostels, specifically because you do not have to use any one type. The style or terms of a lease can be anything you and your landlord have agreed upon. However there are some standard leases that you will likely encounter, so we will cover a few of those here.
Types of Leases
Net lease: The tenant pays all normal fees (rent, utilities), plus all or a portion of the extra associated costs. The property owner is receiving the rent ‘net’ after various expenses are paid. There are three different types of net leases. For each, the tenant generally pays a base of rent and utilities.
• Single net: tenant also pays property taxes
• Double net: tenant also pays property taxes & building insurance
• Triple net: tenant also pays property taxes, building insurance, & property maintenance
Gross lease: The tenant simply pays one flat fee for the right to use the property. The building owner has far more work with a gross lease, as it leaves both costs and building maintenance to him or her. These can include anything from property taxes to basic utilities. Gross leases can be more expensive due to the expenses being covered.
Lease to Own: These are very popular for beginning hostel owners who want to purchase, but don’t have the capital yet. With a lease to own agreement, the tenant starts out paying a rent as usual for the first few years. After a set amount of time (usually 5 or 10 years), the tenant has a ‘purchase option’ which says they can buy the building at a previously agreed upon price, with a portion of the rent paid thus far going towards the investment. There can be more than one buy option; for example, option to purchase after 5 years with another option at 10 (if, for instance, you needed to wait because you didn’t have the capital or access to credit yet but are still interested).
Lease to own agreements can be drafted up a number of ways. One Hostel Management member, collegeofparty, had an agreement that required no extra money than his normal rent each month. From that point of view, there was no risk or downside to taking a lease to own option, with the huge benefit that the purchase cost will lower over the years.
Another member, irish_guy, was previously negotiating a lease to own agreement that had a little more at stake. It involved first giving a percentage of money which the building owner keeps outright. Then a premium is paid on top of rent each month. This premium is set aside and deducted from the pre-agreed sale price.
The downside to this arrangement is
a) none of the initial rent money goes towards purchasing, only the premium
b) if you decide after the set amount of time that you do not want to purchase you lose the premium investment along with the initial percentage paid.
Ground lease: A lease used for tenants who want to build on property without owning it. It defines who owns the land and who owns the building and improvements on the property, and frequently allows a tenant to build on prime location property otherwise out of budget. Unlike purchasing land, a ground lease also does not require a down payment from the tenant. This makes it more affordable and uses less liquid assets.
Note: Ground leases are typically for 50 to 99 years, and used by large chain stores (think Target, Starbucks, Whole Foods). However, while they are not traditionally used for an independent hostel market with shorter time frames, keep in mind that many hostel owners have negotiated the terms of their leases directly with the landlord.
It never hurts to have extra ideas and information on what’s out there in order to draft up a proposal for your own situation. Perhaps it will simply get the wheels turning and help you figure out a hybrid solution that may work for you. Hostels often go up against rigid regulations and bylaws that are not made for the unique situations they bring, and many members have found thinking outside the box has helped them push forward in the process. You never know until you ask!
Change of Use Permits
Whether you are going to buy or lease, you should definitely look carefully into zoning and the bylaws in your town or city. Pretty consistently around the world taking a residential property and turning it into a hostel (a commercial business) requires a ‘Change of Use’ permit. This may be called by a different name, but the idea is the same. Depending on your city, Change of Use may also be required if you have a commercial property but it was used for a different commercial purpose.
Member jonL shared these factors to consider when looking at residential vs. commercial properties:
• Building codes to change from each of these type of classifications
◦ Does turning commercial to a hostel or residential to a hostel require more renovations?
• How comfortable the council is (or any other city department else who must approve) in agreeing to your modification/change of use
◦ Speak to your local council’s planning department for advice/feedback
• How comfortable the landowners are in agreeing to your modification/change of use
◦ They may take some convincing or understanding of what a hostel is
A tip when talking to any city council, officials, etc: Always ask more than one person. You will often get different answers from different people. While this can be maddening, it will also help you gather an idea of what the most common/likely answer is, who is the best person to go to for approval, or at least bring up new questions you need to ask.
What other information do you have about buying vs. leasing a hostel? What has worked for you, or what has presented major roadblocks? Sign in and comment below.
NOTE: These posts are in no way comprehensive, or should be taken as any type of legal advice. I have very little direct knowledge on the subject, but have gathered information from our members via the forum and shared their experiences and insights, along with my own research and lessons on the topic. Feel free to comment on anything that you feel is missing, or is not correct. This is how we collaboratively learn!
**I know many of you comment on these blogs on the site's FB page, which is great, but it would be even better to have the comments directly on here for everyone to read. Thanks for your input and helping to further our knowledge.**
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• Info for these 3 posts comes from: