Can the Inn I love be…
“The Inn of My Dreams?”
By: Richard K. Newman, Founder – Commercial Capital Network
This is the million-dollar question…
Most aspiring innkeepers who contact me do so prior to beginning a serious search for a hospitality property. This makes sense to me, as they have been successful in some other career and have learned that “An ounce of prevention is worth a pound of cure.” They want to do their homework to narrow their search to properties they feel they can afford. Whether they are pursuing a lifelong dream as partners, or they are a single person moving on to a new challenge in a new place; they want the experience to be a positive, productive and profitable one.
The pre-qualification process identifies what assets are available, where they are invested and what the buyer/s are willing to commit to an acquisition. Credit history and professional qualifications are also important to understand so that any limitations or challenges can be addressed early on. Our most important job is to help an aspiring innkeeper identify an inn that is well suited for them based on their qualifications, and that the energy they dedicate to the search is well directed, their expectations are realistic and achievable.
Most sellers are more receptive to a buyer who has been pre-qualified, in fact, this is generally required before the seller will share or authorize their realtor to provide financial information at all. A strong buyer may be able to purchase an under-performing inn if they have adequate capital and an abundance of direct industry experience; but a strong performing inn can offset a buyer’s shortcomings or challenges in experience and or capital.
Identifying qualified properties:
The underwriting of a commercial loan combines the qualifications of the buyer with the financials of the inn. Why get excited about an inn, love the sellers, have them love you, and see yourself as the next innkeeper if the deal can’t work because the net income cannot support the desired level of debt or the asking price is unsubstantiated by is historical performance. It is in the interest of all concerned to know that the asking prices is well supported by comparable sales and three (3) years of financial data. Your offer should be substantially based on the inns historical data not what the inn is capable of producing under new management.
A knowledgeable “B&B Industry Specialist Realtor” can insightfully guide your search for available inns that match your qualifications and vision. Many of these professionals have been innkeepers themselves and are intimately familiar with inn operations and valuation methods. They can expertly compare the asking price with comparable sales, and use their own data and experience to analyze the inn’s historical performance, expenses, ADR, and occupancy rates relative to the industry considering its location and the seasonal nature (if any) of the business.
It is the mission of all who serve the next generation of innkeepers to enhance the quality of their experience and increase the likelihood they will be successful finding the “The Inn of Their Dreams.”
Copyright Commercial Capital Network © 2017
How long will it take, beginning to end, to close once I have identified the Inn of our dreams and made a buying decision?
After the offer and contract has been negotiated and accepted, the mortgage contingency period will begin. Contracts generally allocate 45 days to obtain a mortgage commitment. Due diligence now begins in earnest with the ordering of inspections, title insurance, environmental and survey (if needed). Once received, the mortgage processors review the title, appraisal and environmental issues if any, to build their file for closing. The contract should best case allow 90 day for closing but closings often occur in 45 to 60 days on average.
How can I know if I qualify for a loan to purchase an inn?
A pre-qualification involves the review of a loan application and supporting documentation and is comprised of data and documentation for the buyer/s and quite often a property that is of particular interest. The buyer/s must have adequate capital, credit and credentials, and the property in question (PIQ) must be able to support the desired level of debt; the pre-qualification process is most useful to evaluate the buyer/s price range before the search begins of course, but may be employed to evaluate the feasibility of an acquisition.
How do I determine a fair offering price for the inn/s I am considering?
A knowledgeable “B&B Industry Specialist Realtor” should be engaged very early on to consult on matters of value. Realtors who have been innkeepers themselves and are intimately familiar with their market area provide time saving expertise. They can expertly evaluate the viability of the business and support your offer with their own analysis of comparable sales data, the inn’s Financial Performance, Real Estate Improvements, Good Will, and Furniture and Fixtures & Equipment (FF&E). “A buyer or seller of a business who chooses to represent himself/herself has a fool for a client”.
Are inns offered “For Sale By Owner” worth considering?
They could be, but it is difficult for a seller to impartially establish the value of the business and its assets without the benefit of a valuation undertaken by an industry specialist realtor or an appraiser. The asking price should be backed up with three (3) years historical financial data and comparable sales.
How much do I need to have for a down payment to purchase an inn?
Buyers should have 30% of the project cost to cover the following:
- Down Payment – 10% to 25%
- Closing Costs – 3% to 6%
- Reserves – 6 Months Principal &Interest
What should I look for when shopping for the inn of my dreams?
Aspiring innkeepers should attend industry conferences and aspiring seminars to get a feel for the kind of operation that would best suit their financial and lifestyle objectives. This is fundamental to the beginning of a well-planned investment and will save time, capital and energy. Do all that is possible to enjoy the journey by learning from the unpleasant experiences of others.
The Pre-Qualified Buyer designation was designed to provide Aspiring Innkeepers a credible way to quantify how much purchasing power they have as it relates to identifying hospitality properties that best fit their financial qualifications and professional/personal objectives.
The pre-qualification process reviews a complete an application, personal identification such as driver’s license/s, passports& visas, financial statement/s, account statements, credit, personal debt pay stubs and resumes for all partners.
The Pre-Qualified Buyer’s purchasing power and limitations are determined prior to requesting the financial data and business tax returns from the seller. Realtors and sellers alike are more receptive to investing time with a pre-qualified buyer, because their qualifications and assets have been independently verified, giving all parties the confidence to negotiate the sale/purchase of a business/property.
- CCN’s confidentiality policy requires CCN to keep confidential, all identities, personal data and documents, and shall only use same for evaluation purposes. Once a qualified property has been identified, CCN may use this personal data to combine with property specific financial data to determine the viability of an acquisition relative to the objectives of the borrower/s.
A $425.00 one-time fee shall be charged the borrower to:
- Evaluate ALL financial documents and proofs necessary to issue its opinion on personal financials for two (2) partners as they relate to commercial financing.
- CCN shall Issue a Pre-Approval Letter which may be presented to realtors and Innkeepers.
Few investors/entrepreneurs realize that they have the ability to self-direct their own retirement assets. Most believe the only two options are to borrow or withdraw from their account/s if they wish to invest in real estate or purchase/start up a new business. The down sides are…
- Borrowing from the account/s would requires repayment of the principal with interest
- Early withdraws would be subject to taxes and penalties
There is another way… The Employee Retirement Income Security Act (ERISA), which created the IRA in 1974, places surprisingly few restrictions on how retirement money can be invested. Except for life insurance or collectibles—such as artwork or coins—IRA funds can be placed in just about anything. Tens of thousands of investors have switched their retirement savings to self-directed accounts since the stock market correction of 2000 and 2001. By some estimates, 3% of the $3.5 trillion held in IRAs is now in alternative investments—and the number is growing.
Here is how it works… A Retirement Account Facilitator can create the legal entity and structure that allows for checkbook control of your funds. A new C corporation will be formed which in turn sponsors a Qualified Retirement Plan. The new plan will receive a roll-over of all or part of your existing /previous 401(k) and or IRA Qualified assets. The new corporation will own the real estate, good will, FF&E and other assets of the business. The plan invests in the business by purchasing stock in the corporation, providing the necessary capital to fund the down payment, closing costs, reserves and working capital. The new qualified retirement plan actually purchases the stock of the C Corporation you control, similar to what your IRA/401(k) does currently, that allows you to purchase shares in a publicly traded company.
Here are the benefits…
- You do not re-pay a loan, which adds to overhead and you will not incur tax liabilities and penalties
- Profits, can be sheltered by either:
- Making contributions to the plan which grow tax deferred
- Paying dividend to shareholders at the end of the year
- Ultimately, any gain from the sale of the business/property will flow into your retirement account proportionate to thestock it owns in the corporation.
Very Important! When the cash requirement of an acquisition/start-up exceeds the available account balance, multiple investors may invest in a single project through the same self-directed 401(k) plan; this feature may be very useful/attractive to family members or outside investors who wish to provide financial assistance or take advantage of an investment opportunity.
No outsider can guarantee the soundness of your investment strategy. Seeking advice talking from a trusted financial advisor would be prudent. Unless you have both time and capital to spare, you should be cautious before putting your entire nest egg into a new business; however, investors with a strong do-it-yourself streak and a compelling alternative investment strategy may want to consider joining the growing ranks of people who have decided to invest their retirement funds in themselves. Note: The material contained in this overview is provided for your general information and should not be acted upon without prior professional consultation with the appropriate experts.
About the author: Rick Newman founded Commercial Capital Network in 2004. His website www.InnFinancing.com provides useful information to Aspiring Innkeepers who wish to purchase “The Inn of their dreams” and Innkeepers who seek to re-finance or re-structure debt obligations.
In 2007 Rick introduced an innovative program to the hospitality industry, which liberates the use of retirement assets for the purchase of an inn without incurring penalties or tax liabilities. This program has helped many of Rick’s clients access capital to fund a more significant down payment.
Rick’s connection to the hospitality industry has its roots in his family’s 30-year ownership of a twenty-eight-room inn in New Hope, Pennsylvania. He maintains relationships with leading hospitality professionals and industry specialists, and has authored numerous articles on subjects of special interest to aspiring innkeepers. His testimonials pay tribute to the relationships he has developed with his valued clients. Rick is a member of Professional Association of Innkeepers International (Paii) and Association if Independent Hospitality Professionals (AIHP).
For a review of your options, please call Rick Newman at 570-213-1903