GUESS WHAT? (by grandpa)

I am going to go back in time again. Can you believe that?

I have been writing about our growth and success, but how did we do it? I learned two valuable basics at Motel 6: #1 Location, location, location and #2 the OPM system (other people's money).

Location was first because without a good location you would not be successful in the long term, because you would not have a good profit with a poor location. But why OPM? Because you could never have enough money on your own. You had to have some as it always took a little bit here and a little bit there - Bill and Paul with Motel 6 started with $70,000 borrowed by Bill to get started. But let's say you wanted to build and operate a 100 unit motel. The site would cost you $120,000, then it would cost another $450,000 to have it built, $80,000 in furniture for a total cost of $650,000. The lenders would not go over 75% loans so you had to come up with the $165,000 shortage in cash. If your goal was 100 motels you would need $16,500,000. The answer came in two parts. First you did your own building at cost (no profit to you), which would save about $50,000 in the general contractor profit, then you would buy your furniture with long term contracts with suppliers and get the discounts involved there. This would save an additional 30% or approx. $25,000 . Savings to date $75,000.
The second part was the big one. You would approach the landowner not on a purchase, but on a long term lease - usually 20 years, with six 5-year renewal options. The lease would be based on 10% of the land value (with cost of living adjustments every five years). The hardest part would be to persuade the landowner to subordinate his land to the first Deed of Trust - i.e. the value of the land would be taken into account by the lender and would back up the loan. We in turn would guarantee that we would not exceed 70% of the appraised value of the land and finished motel in the amount we borrowed. The net result was that we ended up with a motel with little or no money invested in it, which allowed growth without cash investments - only time and effort. That's the O.P.M. system.

At Motel 6 I wasn't involved in site work or building, but took over responsibilities with furnishing and operating the motels. At Regal 8 Inns, the duties and responsibilities rested squarely on us. Margaret and I had site work, lender preparation, feasibility studies and presentations for the lenders etc. I also did all the negotiations for build-to-suit and lease-backs, plus long term leases on acceptable existing properties, plus out-right purchases of existing properties (with limited downpayments of course!). Added to that was the franchised motels to others. But no matter what means we acquired the motel, the goal was always to doing it with the OPM system.

The big key to carrying this off was to always show a successful operation - show that we were making good profits from every existing motel, so the bottom line was the operations of the motel and of course location, location, location.

I'll try to lighten up on the next blog, but thought some might be interested in the logistics.