Inn The Know

Timing is Critical when Purchasing a Hospitality Property

2011-01-21T11:04:00.000-08:00

Despite the fact that we've been involved in listing and selling inns for a number of years, I'm still amazed at how critical the timing of the inn transfer is for the buyer.

Last year I bought an inn out in Sonoma County, California, and learned that lesson the hard way! No matter how much homework you may think you have done, there's always surprises. As I sit here in the dead of winter, looking out the window at the vineyards, verdantly green and just about to ready to flower with the mustard plants that form the ground cover for most vineyards in the area, I just can't believe how quiet it is! It's 70 degrees outside in January and there's not a single guest at the inn.

Where is everyone? Well, as it turns out, few visitors come to wine country (despite the fine weather) because the wineries do little with their wine until barrel tasting in March. They may be open for business, but they're neither harvesting, nor blending, etc., and apparently visitors don't come during this period. Who knew?!!

Projections for a hospitality property investments are always required by lenders, and a property's income is projected on an annual basis, so oftentimes monthly revenues are not even reviewed.

The variance in monthly revenue is typically huge for hospitality properties located in heavily touristed areas. At this inn, revenue in October is about 20 times as much as it is in January! So, creating reserves for off season months MUST be done in high season. Missing even a SINGLE month of high season will usually dramatically increase the working capital requirement for the off season months.

Timing is critical! Make sure you closely review a property's revenue by month so that you'll understand the best time to close on an inn. This will vary according to how much time and investment must be made in preparation for the busiest months.

For example, if a new website is being created, you'll need several extra months to get that squared away. I went through 16 drafts of mine before it was ready to be submitted to our developer, Acorn Internet Services.

If you're updating decor, allow extra time for that. Etc, etc. It always takes longer than you think, but if you don't hit the ground running when the season hits, you'll be playing catch-up, sometimes for years.

Today I reviewed a revenue/expense projection for a prospective buyer looking at a property in Estes Park. Even though it's still January, these buyers are almost too late to get started! They have to sell a house, the "fly in the ointment" for most, and are likely to miss out because they really aren't "ready".

Buyers will often wait to sell their homes because they want to find the right inn first. Sounds reasonable but it's often a blunder, and we've seen many buyers lose out on their dream property because they wait to put their house on the market. It's a quandary, and we have several buyers in that position right now.

In Colorado, if you haven't found the right property by the end of February, it'll be too late in the year to take over an inn.

That said, January is the month that most buyers come out of the woodwork, and I think it has something to do with taking stock of one's life as the prior year draws to a close. Well, get going!!! If you sit on your computer late into the evenings, looking at inns for sale on the internet, by the time you find one, work up the nerve to call the owner/broker and put the wheels in motion, it'll be too late.

Timing is critical and putting your house in order a must if you want to time a transition to a hospitality property correctly.

To all you dreamers out there, get cracking!

SBA Refinance Opportunity for Small Business Owners

2010-11-01T11:49:00.000-07:00

Thinking of re-financing your inn? Interest rates and terms have never been better! If you are an existing innkeeper who would like more information regarding the possibilities of re-financing your property please contact us. We work with one of the premier SBA lending specialists in the country, who is currently helping many small business owners re-finance into lower rate loans with more favorable terms. New SBA rules and loan limits were recently signed into law, affording business owners opportunities to obtain either lower rate fixed interest loans or loans with working capital for necessary repairs and improvements. Call Becky Goldsmith for more information:

720-979-3184

What the SBJA means to Innbuyers

2010-10-01T09:18:00.000-07:00

The new Small Business Jobs Act has some interesting aspects to it that should create some liquidity in the hospitality lending arena. There is one significant, albeit little understood, addition which should encourage anyone who is thinking about purchasing this type of property to become more active in their innsearch. This is a bit technical but very important to understand, so please bear with me.

For the next two years or so, SBA 504 loans will offer a guarantee to the ultimate holder of the loan, which will range from 75% to 90% (depending upon when the loan is funded in the secondary market, and which for all intents and purposes is more likely to be 75%).

The guarantee allows the bank which originates the loan to sell off the majority of the loan (the piece that carries the guarantee) into the institutional market. These debt instruments are very liquid and typically carry a premium of approx 65 basis points over the 10 year treasury, so imagine how low the borrower's rate is on this!

The creation of this secondary market makes the loans very attractive for the originating bank for a couple of important reasons: first off, they are able to reduce the risk of the loan by moving the bulk of it off their books, and secondly, they earn the origination fee on the entire amount of the principal funded.

This provision in the SBA's SOP (Standard Operating Procedure---sounds like whoever came up with that acronym was in the military, doesn't it?) is due to sunset (as in go away) in late 2012, or until 2 billion in loans are funded, whichever comes first.

Now, once you've chewed on that for awhile, you'll understand why it's so important. Everyone knows that the banking industry is in the toilet, so if there's a way to reduce their portfolio risk (which comes about because they will have a larger number of smaller loans) AND earn some serious fee income for doing the origination, think how attractive that will be for the banks!

Moral of the story? Get out there and start looking for the hospitality property you dream about. Now is the time!

Small Business Jobs Act Signed Into Law Today

2010-09-27T12:37:00.000-07:00

Good news on the SBA financing front! Obama signed the 2010 Small Business Jobs Act, and highlights of the new bill with regard to SBA loans include:

Increase in the guarantees for SBA’s largest loan program (the 7(a) program) to 90% and reduction of fees for the 7(a) and 504 program – has the capacity to support $14 billion in lending to small businesses.

•Within Coming Weeks, the Bill Will Allow SBA to Support Larger Loans As Well: The bill also increases the maximum loan size for SBA loan programs, which in the coming weeks will allow more small businesses to access more credit to enable them to expand and create new jobs. The bill also

◦Permanently raises the maximum loan size for the SBA’s two largest loan programs, increasing maximum 7(a) and 504 loan size from $2 million to $5 million.

Permanently raises the maximum loan size for SBA microloans, increasing it from $35,000 to $50,000.

◦Temporarily raises the maximum loan size for SBA Express loans from $350,000 to $1 million, providing greater access to working capital loans that small businesses use to purchase new inventory and take on their next order – allowing them to create new jobs.

•Treasury Is Working to Quickly Implement the Small Business Lending Fund and State Small Business Credit Initiative: In addition to these SBA provisions, Treasury is working to quickly implement two new programs designed to support private-sector lending to credit-worthy small businesses, and expects to release further details in the coming weeks concerning applications for these programs.

◦The Small Business Lending Fund would make available $30 billion in capital to small banks with incentives to increase small business lending, potentially supporting several multiples of that amount in new credit.

◦The State Small Business Credit Initiative will support at least $15 billion in new lending by strengthening state small business programs – many of them facing budget cuts – that leverage private-sector lenders to extend additional credit.

The Three Legged Stool

2010-08-25T14:47:00.000-07:00

My Inn Matchmakers partner, Becky Goldsmith teaches our aspiring innkeeper clients about the three legged stool of innkeeping. She likes to keep things simple and try as hard as I can to overanalyze the data, good innkeeping still comes back to the basics:

1--Great housekeeping.

2--Superior hospitality.

3--Exceptional marketing.

Over the years, we've found that if one of these "legs" is wobbly, the stool cannot support its weight. Sounds so simple, but you'd be stunned at how often we see inns where one of these elements of success is missing.

It's the third leg that is most often the deciding factor, and the hardest in which to excel. I believe that's because the onslaught of changes on the internet marketing front are absolutely overwhelming for most innkeepers. As a new innkeeper myself, I can relate.

That said, each month I face my fears, and participate in Acorn Internet Services' monthly internet marketing webinar. After it's over, I'll usually consider a frontal lobotomy because there's so much to learn. So far, I've opted to stay out of the OR and have a stiff drink instead.

Today I chatted with Lisa Kolb (Acorn's founder and co-owner) for over an hour after the webinar was over. We share the same frustration. She's trying to help innkeepers improve their business and MAKE MORE MONEY. I'm trying to help innkeepers maximize their investment return, and to do that, they NEED TO MAKE MORE MONEY! So, Lisa and I are both trying to accomplish the same thing. Despite our efforts however, more and more inns are going under, and I believe that this is going to continue for some time.

As an ex-business consultant, I know that the biggest problem that small business entrepreneurs face is that they don't stay engaged in their "highest and best use". If something needs to be done, they do it. Like housekeeping for instance.

This, my friends, is the slow kiss of death. If you don't learn to place a higher value on your time, and rise to your highest and best use (which, by the way, unless you are an illiterate monkey, is NEVER EVER cleaning toilets), your business will languish. I promise you that your time is worth more than $10 or $12 bucks an hour, and you can find housekeepers who will do a fine job for that pay. So do yourself a favor, and pony up the $15 bucks or so to get a room cleaned. YOU my friend, have a higher and better use!

ALL innkeepers expect to sell their inns at a profit, and it's an ugly road for those who find out that this dream has turned into a nightmare. I see this more often than you would like to know, believe me! So, don't become an unfortunate statistic. Take the bull by the horns, and get cracking on your marketing! Like castor oil, it may not taste good going down, but you'll be glad you swallowed it by the next morning.

And, over the long run, when it comes time to move on with your life, you won't have to make excuses about why your inn's income is so awful. Don't expect some rich California buyer to come along and pay cash for your money pit. That ship done sailed......

What's Happening with Inn Prices

2010-07-25T08:34:00.000-07:00

Wow! It's not pretty out there! We just got back from our travels to the southern part of the state. We previewed several inns/resorts that we have advertised on our website, and concluded that prices are coming down (sometimes WAY down!) on hospitality properties. Take a look at these:

http://www.innmatchmakers.com/prp/190.html (reduced over $400,000)

http://www.innmatchmakers.com/prp/153.html (reduced over $400,000)

http://www.innmatchmakers.com/prp/142.html (reduced $300,000)

http://www.innmatchmakers.com/prp/159.html (reduced $370,000)

http://www.innmatchmakers.com/prp/113.html (reduced $500,000)

http://www.innmatchmakers.com/prp/137.html (reduced over $300,000)

http://www.innmatchmakers.com/property.asp?strUnit=192 (reduced $500,000)

The lesson to be learned from this has to do with pricing. The initial listing price for a hospitality property should never be a number pulled out of the air. We always ask our new listing clients to have an appraisal done on their property. This step can save a ton of headaches down the road, and it certainly helps buyers understand how the price came to be.

Sadly, sometimes the news isn't good for sellers and was the case of a property we were asked to list this week. The owners found out that property values in their area have dropped precipitously, and their bed and breakfast is worth HALF of what they thought. They elected NOT to list at this time, and to wait for a better market. This of course, is always an option for owners who haven't entered the "burnout" stage yet. Saddened though we are, we've also saved ourselves, the owner, and any prospective buyers from future headaches.

Strike While the Iron is Hot!

2010-07-17T17:30:00.000-07:00

I just got off the phone with a potential inn buyer who had his sights set on a property that appeared to be a perfect fit for him. A one-of-a-kind mountain lodge in a town outside of Rocky Mountain National Park, it's a place where this man has owned a cabin for over 35 years. In other words, it's a place he knows and loves well.

He's had his eye on the property for over two years, even stopping by to take a closer look. Now, he's on his way to the area next month and would like to see it. Finally. Well, guess what? There are two other offers pending on the property now so it's likely that he'll lose out on what would have been a match made in heaven. And, if he wants to move forward and make an offer, he's in a competitive situation, never a good place for a buyer to be in.

Amazingly, this happens often! It's almost as though a message is sent out into the cosmos that brings people out of the woodwork so that they can all bid on the same property.

The truth is, you never know when a property is going to get some action. When you're searching for a needle in a haystack, if the opportunity comes along, it's better to strike while the iron's hot! That way you'll avoid the disappointment that's sure to follow if that dream property of yours slips through your fingers because you thought it would sit on the market forever.

I HATE it when that happens!

When You Can't See The Forest For The Trees

2010-06-20T08:56:00.001-07:00

Becky and I visited several inns this week and I was struck by the condition of a couple of them. Sometimes it takes a pair of fresh eyes to see what's really there, and sellers who have inhabited a property for a long time can tend to lose sight of what is right in front of them.

To begin with, it's incredibly difficult to get a qualified buyer to a property in the first place. Innbuyers often travel hundreds, sometimes thousands of miles to look at a property. When they finally arrive on site, they are ususally hyper-aware of condition issues. I looked at a small resort property the other day with a couple who traveled in from Texas, and despite the fact that the guy was very handy, he couldn't seem to take his eyes off of all the items that needed repair. This couple couldn't get beyond the condition issues and have moved on to look at another property (which, by the way, looked amazingly good after what they had just seen).

So, now it's my job to communicate to that property owner that there are significant condition issues facing them. This can be an onerous task, and this particular property owner has commented a number of times about all the improvements they have made! In reality, the place needs an overhaul.

The remedy to this situation, of course, is to have the property inspected BEFORE it goes on the market. It's well worth the investment. It's a crime to watch a qualified buyer walk away from your property because they don't want to take on that extra responsibility of making repairs.

The property mentioned above has been on the market for over four years now. I've shown it a number of times (it's not our listing) and every time I hear the same thing as feedback. Condition issues are killing the sale, and the owners of this property might as well have shot themselves in the foot.

Innsellers, if you can't see the forest for the trees, hire an inspector to be your guide. Then, make the repairs! That way when the rare buyer with a million in cash to put down on a property comes along, you won't be staring at their backs as they head off to look at another property.

Income Valued Bed and Breakfasts: Like Searching for the Unicorn!

2010-05-01T10:15:00.000-07:00

If I had a nickel for every time we've been asked to find an income producing bed and breakfast, I'd be retired by now! I really wish that people could get it into their heads that owning a bed and breakfast is NOT about the current income.

How much you pay for real estate has a lot more to do with where it is LOCATED rather than what it produces in income. Real estate in Manhattan, New York costs A LOT more than it does in Manhattan, Kansas. PERIOD. Different cap rates apply, and I would venture to say that the cap rate used on Manhattan, NY real estate is HALF that of Manhattan, KS. Which means, in English, that the income value for New York property is twice that of property in Kansas. Even though it's TWICE as expensive, which do you think is the better investment? No contest! Manhattan, NY beats Manhattan, KS, any day of the week.

Location. Location. Location. THAT'S the cardinal rule of real estate, and it's no different when evaluating bed and breakfast properties. The more touristed the area, the more beautiful the property, the more expensive it will be. PERIOD.

Trying to find a bed and breakfast in a highly touristed part of Colorado that is priced at a 10% cap rate or better, and which also happens to include a nice owner's quarters AND sits on acreage, is a fool's errand. Please don't call us if that's your expectation. I'm sorry that you went to that aspiring innkeeper's class where you were taught to value the income stream of a bed and breakfast above its other attributes. Is there any way you can get your money back?

The attribute you SHOULD be focusing on, PARTICULARLY with bed and breakfast properties, is its potential for APPRECIATION. That is where the REAL money is, and the sooner you realize this and adjust your expectations, the better off you will be. 9 times out of 10, the inn owner will make the lion's share of his/her investment return when the property is sold. And, all things being equal, the longer they own it, the more they will make when they sell it. (For help with this concept, please check out the investment return calculator on our website, http://www.innmatchmakers.com/investmentreturncalculator.asp.)

So, inn buyers out there, do yourself a favor! Adjust your income expectations, and start evaluating opportunities based upon a property's appreciation potential. Cease your search for a bed and breakfast that cash flows with 10% down. It's like looking for the unicorn.......

Innkeepers, Don't Stick Your Head in the Sand

2010-04-26T20:33:00.000-07:00

Today Becky and I were working together in her office and she got a call from a Realtor on the Western Slope of Colorado who asked us if we would co-list a bed and breakfast with him. In the summer of 2009 we had brokered the inn across the street from the one he was listing and he knew that we could help him find prospective buyers.

We've learned over the years that before we say yes to that question, we need to know more about the property. In this case, the news was dismal. The owners wanted to list their property, which had six guest rooms, 4200 square feet, gross revenues of around $65,000 and an owner's quarters in the basement, for $850,000.

The property we had brokered right across the street had 13 guest rooms, 7000 square feet, gross revenues of $220,000 and a three bedroom, two bath owner's quarters that took up the entire lower level of the building. It sold for exactly a million dollars.

What ARE these people smoking?!! Using the sold comp for price comparison, this property should be listing for at least $200,000 less than $850,000. So, after we had shared our pricing concerns with the listing agent, his comment was, "I get to put a sign in the yard, and I'll pick up some business that way". And, he also said, "If I don't take the (overpriced) listing, the broker down the street will take it."

What ARE these people smoking?!! Innkeepers, a word to the wise. Before you put your inn on the market, order an appraisal on the property. Pulling a number out of the air only hurts you in the long run. Don't become grist for your listor's mill, by giving them the opportunity to find some buyers at your expense. If your property doesn't appraise for your negotiated price, it's not going to finance ANYWAY! Don't stick your head in the sand, or you will be on the market FOREVER.

Needless to say, we took a pass on the co-list.

Innkeepers, Save Your Sprint for the Homestretch

2010-04-22T08:36:00.000-07:00

Something interesting happened yesterday, and it made me really sit back and think. A few days ago, we had shown a very well located but non-operating hospitality property to one of the most experienced innkeepers in Colorado. This man had sold his inn a couple of years ago, an investment grade property with 8 guest rooms, and gross revenues in excess of $400,000 a year. Pretty amazing, right?

He was obviously an extremely successful innkeeper, and I was really surprised when he took a pass on this non-operating, pre-foreclosure property despite the fact that it was a great deal. This property had 9 guest accomodations, and was located just a mile or so from a world class ski area. Priced at $650,000, the property had been recently valued at over a million dollars.

As it turned out, our man just didn't have the risk tolerance to take that on, and despite the fact that he had a history of delivering extraordinary results, he was just too scared. Innkeepers, if a guy like this is afraid to tackle a high risk inn, think about how much more difficult it is for an innbuyer coming into the industry for the first time? They are TERRIFIED!

So, knowing what we know about the typical innbuyer's lack of risk tolerance, why do so many innsellers take their eye off the ball, and settle into mediocre management of their properties at such a critical time? When a patient is undergoing surgery, does the surgeon walk out of the operating room in the middle of the procedure? Of course not!

Then why is it that most innsellers think that they can take their foot off the gas pedal when their inns are up for sale? Hey guys! We KNOW you're tired! But, do you want to shoot yourself in the foot now? In the homestretch, where performance matters the most?

We've been innbrokers for about six years now, and I finally understand why most inn brokers turn into consultants. Personally I used to think they were just pansies. Now I understand! It can take years of prep to make an inn salable, and frankly, the majority of innkeepers should pay a lot more attention to their exit strategy planning.

I can't tell you how many declining p&l's we come across! And we hear the same old excuses from owners: they have health problems, the economy is down, their dog ate their homework.... bla bla bla.

Well, you know what happens to the racehorse that loses? They go to the glue factory.

Innkeeping is serious business. And, in these days, if you don't want to lose your shirt (which is happening all over the country these days) then you'd best put your nose to the grindstone, excel in your hospitality, stay on top of internet marketing trends, get some good education, keep your property in tip top shape (including the owner's quarters), and put the pedal to the metal. Remember this, every $10,000 of net operating income is worth approximately $100,000 in value. If your NOI drops by $20,000 because you're having a tough year, plan to take $200,000 off of the price.

Listen up innkeepers! Don't drop dead on the homestretch, or the glue factory awaits.

SBA Financing Window Opens for Bed and Breakfast Inns

2010-04-19T07:40:00.000-07:00

Good news on the bed and breakfast financing front for 2010. The SBA has opened up a window of opportunity, making 2010 a great time for buyers of hospitality properties.

SBA 504 loans now offer a bank guarantee, thereby greatly reducing default risk, which in turn is creating a more active secondary market for the loans. Banks which underwrite 504 loans may now resell up to 85% of their positions into the secondary market, and get paid 3-5 points for the privilege. Hoorah!

The "window" is slated to stay open until February 16, 2011, or when the pool reaches 3 billion, whichever comes first. The impact of this program has farreaching effect, yet is virtually unknown to all but the most informed bankers. As word gets out, we anticipate that more banks will be interested in underwriting these loans, a win-win situation for all.

Anyone still dreaming of buying a bed and breakfast may have that opportunity during the next 10 months, so go on, get out there and start looking. It's a buyer's market!

Getting a Hospitality Loan; What a Nightmare !

2009-05-05T16:56:00.000-07:00

Today we just found out that one of our innbuyers needs 40% down to get a loan. She brings over $200,000 a year in income and already owns several million in real estate. What! Are you kidding me?