“We were pleased to provide funding for this wonderful inn, and to once again work with Eliot Dalton of Inn and Vineyard Brokers, New York.”

The last time interest rates were at present levels, the Howdy Doody Show was a daily favorite of  many of the profile/traditional buyers shopping for “The inn of their dreams”. Couples who have “Retired but are not Tired” are the typical buyer for bed & breakfast/inn properties. With the unemployment rate hovering at 8%, more and more of these semi-retired couples are discovering that they can find employment through the acquisition of a business and are beginning to discover the many opportunities that exist in the hospitality industry. Many of these buyers have financial resources beyond just savings or equity in real estate; in fact it is a little known fact that retirement assets can be used to acquire a business.

Most people believe that the only two options available to them if they want or need to access capital from their     retirement plans are borrowing from the plan or terminating the plan all together. While borrowing involves repaying the principal and interest, an early withdrawal may be subject to a pre-distribution tax and penalties. Neither option    makes sense for most investors but 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. To view the full article which will  detail the benefits of this program, please visit: www.InnFinancing.com

Are you an Innkeeper thinking of selling your inn?    Since the value of commercial real estate is substantially based   on the income generated by the business occupying the asset, a seller should do all that is possible to maximize the    gross income and control expenses to achieve the largest Net Operating Income (NOI). Refinancing current liabilities may be desirable or necessary to fund improvements that will make your inn more desirable to perspective buyers and will undoubtedly impact the value of the business.  If your exit horizon is within the next few years you will want to do all you can to enhance the value of your inn.

• Make sure your financials accurately reflect the businesses income and expenses
• Show all you can on the bottom line  
• Add guest rooms to achieve the economies of scale and increase your gross income
• Expand facilities to accommodate events and increase the top line

 Now is a great time to reorganize debt, make capital improvements or refinance a loan that is ballooning, adjusting  or priced above prevailing commercial rates.  How long interest rates will stay at this level is anyone’s guess but many experts express concern over the future of our economy and the impact market conditions will have on long-term      interest rates.

A  Reality Check for sellers and buyers alike:  Business Tax Returns are everything when underwriting a commercial loan request.  The business   returns must document that the net income from the business alone can comfortably service the desired level of debt.  It is understandable that innkeepers reduce taxable income by deducting every justifiable expense they can, this practice may work from the owners’ perspective, but it can make financing an inn these days extremely difficult when the   business shows red ink.  Income from sources outside the inn can rarely be used by the Loan Analyst to offset losses in the operating income from the inn.

The loan amount and Loan to Value (LTV) is established based on the analysis of the business financials and the “Appraised Value” as determined by a full narrative commercial appraisal which has been conducted by an appraiser who has been approved and generally selected by the lender.  The actual loan amount will be determined by the Loan Analyst/Underwriter, based on the historical record of income and deductions from the tax returns not the P&L’s.    Generally speaking, the only add-backs to the bottom line on the business tax returns are:  Officer’s Salaries or Rent, Mortgage P&I and Depreciation.

Good Planning produces positive results, so it is important to be well informed plan your moves carefully. The current real estate and financial markets, challenging and difficult as it is, can offer opportunities if you know where to look  how to approach them and have the good sense to seek the advice and assistance advice from qualified professionals  such as accountants, lawyers, industry specialist realtors, industry consultants, appraisers and lenders.

About the author:   Rick Newman is Managing Partner of Commercial Capital Network, (CCN) who through his websites and articles provides useful information to Innkeepers who seek to re-finance/re-structure their existing debt and Aspiring Innkeepers purchase “The Inn of their dreams”.

CCN offers commercial loan programs that are perfectly suited to the unique needs of the hospitality industry.  CCN provides access to commercial loan programs that may be used to either purchase or refinance bed & breakfast /inns. The company is a member of select regional and state hospitality associations, the Professional Association of Innkeepers International (PAII) and maintains relationships with leading hospitality affiliate organizations and professionals. The company is well known in the industry for consulting with Innkeepers and Aspiring Innkeepers to help facilitate the orderly exchange of information and data.

By Rick Newman, Managing Partner of Commercial Capital Network, LLC

2013 looks promising for commercial banks and non bank lenders alike.  For the first time since mid 2007 my investors are more flexible when considering properties  in the hospitality sector.

What a great time to buy!  Rates are the lowest in decades, how long will rates stay at the present level is anyone’s guess but the 5% range for a 5 year fixed 25 year term makes for a very compelling reason to buy now.   High unemployment among middle aged individuals seeking a career change combined with low interest rates and large supply of available inns makes for an interesting combination of events providing a unique opportunity for Aspiring Innkeeper’s to get into the “Inn of their dreams” at prices, rates and terms that are unique to our times.

Aspiring Innkeepers who have their hearts set on acquiring that “Fixer-Upper” or an under performing inn, “A Gem in the Rough”, should consult with industry professionals as to the potential viability of the property and carefully evaluate the wisdom in spending time and money on the due diligence process unless you have the following:

1. A down payment of 20%
2. Cash reserves necessary to offset losses while increasing the cash flow from point A to point B in the business plan
3. A resume that contains direct hospitality experience or transferable qualifications
4. A seller who realizes that an under-performing business is worth less than a profitable one and has priced it accordingly.
5. A seller who is willing and able to hold financing for any shortfall between the appraised value or Loan to Value, and your down payment

Using 401k/IRA Assets to fund a down payment: For most investors, losses experienced in the stock market, 401k/IRA’s and or equity in their homes, equates to a reduction in cash/equity they have available for a down payment.  This reduction in purchasing power may require an investor to seek seller financing, a less expensive inn and or use their 401k/IRA assets to fund a down payment.   Few investors/entrepreneurs realize that they have the ability to finance the purchase of a business with retirement funds.   Most people believe that there are only two options available to them if they want or need to access capital from their plan/s.  Borrowing involves repaying the principal and interest and an early withdrawal may be subject to a pre-distribution tax and penalties.  To View full article CLICK HERE

Tax Returns are everything…. It is quite common for small business owners to reduce their taxable income by claiming every justifiable expense they can on their tax returns; this practice may work from a tax perspective but can make financing the inn these days extremely difficult.  P&L Statements may be used to make a buying decision, but lenders use tax returns when underwriting a loan request; P&L’s are only used by the Underwriter to cover the Year to Date (YTD) if the return has not been filed.

Pre-Qualification: Commercial loan applications not only compile the data on the property, they also require a full disclosure of all personal assets and liabilities, credit qualifications, resumes and personal guarantees for all stockholders who will own 20% or more in the stock of the company.   To read Overview CLICK HERE

Business Plans are critical, and should be thoughtfully prepared to articulate a reasonable strategy for the business going forward.  If the historical financial data supports the desired debt service GREAT, if not well documented projections backed up by credible data sources and assumptions will be necessary to support the feasibility of the plan.  For a list of qualified professionals to assist you in drafting such a plan. More about this. . .

The BIG Picture:  All Bed & Breakfasts/Inns are unique by design; in fact, it is that unique quality that separates one Bed & Breakfast/Inn from the next.  Innkeepers invest their energy and capital over time to create a welcoming and hospitable environment that is unique to their community and valued guests. While the charm and ambiance of an inn add to a patron’s experience, such intangibles have only an indirect effect on the actual value.

An Inn’s commercial market value will ultimately be determined by evaluating the values of the real estate, cash flow, good will and sometimes furniture, fixtures and equipment (FF&E).   It is important that you are comfortable with this value before making an Offer to Purchase or a Contract of Sale.  Realtors who specialize in marketing and selling Bed & Breakfasts/Inns have access to comparable sales data and property specific financial information that should support the asking price and may be made available to “Qualified Buyers”.   The concentration of Bed & Breakfasts/Inns in a particular area may or may not be insufficient to develop the comparable sales data that will be acceptable to a lender.   A lender familiar with the industry, an accountant or qualified industry consultant’s services should be used to analyze the financial data to be sure that income from the property can support the debt service relative to the down payment and your investment objectives.

The Contract of Sale is the controlling document in a purchase and should reflect terms that are practical relative to the down payment and the financing terms for which you are best qualified.  The value of the business’s “Good Will” and FF&E may be assigned separate values from the real estate in the Contract of Sale. Try to avoid this if possible as loan programs that accommodate financing anything other than real estate are less flexible and sometimes difficult to obtain. It is always a good idea to consult with a knowledgeable lender before entering into a Contract of Sale, since a lender who is familiar with bed & breakfast properties can pre-qualify you specifically to the property you have identified.

Most Contracts of Sale contain a mortgage contingency clause of 30 to 45 days, the exception being cash transactions, 1031 exchanges of equal value or sales where the seller has agreed to be the primary lender. The contract will also contain inspection clauses for items such as insect infestation, plumbing, HVAC, electrical and the structural integrity of the building(s).  During this ‘due-diligence period,’ it is also common to incur attorney fees, survey fees and title fees.

It is therefore important to note, that should the appraised value be determined to be less than the contract sale price, the appraised value will be used to determine the actual loan-to-value, rather than the contract price.  If this should occur and the parties cannot agree on a revised value or contract terms, the buyer risks losing all or a portion of his/her due-diligence expenses.   It is also worth noting that when a property’s value as determined by a qualified appraiser is less than the contract price the parties to the contract may decide to re-negotiate the sales price and modify the contract accordingly; however, since appraisals often take thirty days or more to complete, the parties and their agents may find it challenging to work through their respective issues and ultimately the seller may decide they will not or cannot accept the lower value.

Conclusion:  In the end, determining the value of your business could save all concerned time, money and the anxiety associated with the unknown.  The real benefit is that Innkeepers and their realtors can market the property with confidence by having a qualified valuation or appraisal available to share with qualified buyers, their advisors, realtors and ultimately, a lender.

Note:  Most lenders will only accept an appraisal if dated within six months of the date on the appraisal, it may also be acceptable to the lender to have the same appraiser update the appraisal which is deemed out of date which will save the buyer time and money.