Several reasons can result in foreclosure of motels in the long run. First, investors in the motel industry may experience the challenge of increased operating costs as a result of the appreciation of land on which the motel is built upon (Stephen Rushmore & Rubin, 1984). For private owners of motels, the appreciation of the value of land means that the proprietor has to pay more property tax compared to previous years. Unfortunately, the increase in taxes means that the motel has to incur more operation expenses thereby affecting the profitability of the business.
Ultimately, the increasing cost of operation of the motel and decreased profitability forces low income investors out of the area in a process known as gentrification. The investors, therefore, move out of the area by selling out the property to other developers and invest in a different area where property tax is relatively low (Harper, 2013). The reason for relocation is arrived out at analyzing the opportunity cost relocation; that is the opportunity cost for relocating to a new area is continuing to operate the motel in the highly valued land property where the investors pay high level of property tax. However, the relocation is also influenced by the enticement of money proceeds offered in the sale of the property.
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Lastly, the owner of the motel can also decide to invest in another business that is more profitable compared to the motel business. Fundamentally, the decision to close the motel is determined by the opportunity cost of operating the motel on the same piece of land whose property value is increasing that is the value of the second-best alternative foregone after the closure of the motel (Harper, 2013). The investor should, therefore, weigh between the closure and continuing operation within the location with the objective of maintaining profitability.
References
Harper, D. (2013). Valuation of hotels for investors . Taylor & Francis.
Stephen Rushmore, C. R. E., MAI, C., & Rubin, K. E. (1984). The valuation of hotels and motels for assessment purposes. The Appraisal Journal .
