Sunday, February 19, 2017

Understanding The Numbers

I was looking at some numbers this morning (despite it being a Sunday, my mind just won't rest) and thought I'd share the general basis of determining value for hospitality properties. And this information is helpful to buyers and sellers.

Here you first see a cash flow scenario based on three fictitious properties to see if each has a cash flow that would work if trying to obtain financing. Then I look at the three properties if using the same cap rate (cap rate is essentially a way of looking at a return on investment) and we've been seeing around a 9% as of late (not considering reserves and management fee, but that's an appraisal topic for another blog post). The last scenario shows two properties with the same revenue but different expenses. And the bottom line is, if you control your expenses, you can increase your value. Of course if you can increase revenue and control expenses, that's the best scenario!

As a buyer, you can see how putting a bit more down can potentially buy you a lot more cash flow.

It is natural to try and minimize your taxable gain (as any business owner) by expensing more on your tax return (rather than putting certain expenses on a depreciation schedule), but in the end, the value of your inn when you go to sell is based primarily on your last three years of tax returns! Visit my website ("Understanding Value") for a link to a full spreadsheet in a pdf format.

For buyers, there really isn't enough information here about Property A, B or C to make a decision on what you'd want to buy. Factors such as location, lifestyle you choose (and at what pace/occupancy), staff or no staff, etc. could affect your decision. Some buyers want to own a B&B that can provide a comfortable pace, and not opt for a high performing one. 

A lot goes into choosing the right property for you. 

Friday, February 17, 2017

Residential vs Commercial Real Estate: Two Entirely Different Animals

I'm connected to a lot of real estate agents all over the country through social media. And I am always watching the 'market' around the country through the eyes of my fellow real estate agents, just to have an understanding on what's going on. Though much of what goes on in the residential 'market' doesn't affect the commercial market and what I sell, the ability for my buyers to sell their homes in order to use the equity to purchase what I sell does affect what I sell. So I pay attention.

The other day I was watching a video on Facebook by a Realtor in North Carolina about what we provide to our clients as Realtors®. It reminded me that not all consumers understand the difference between a REALTOR® and a licensed real estate agent. And although that's really not really the focus of this post, it's important and there a few things you should understand. And then I'll get into the differences between residential and commercial real estate!

As a licensed real estate agent who chooses to subscribe to the Code of Ethics of the Realtor® organization, we agree to certain fiduciary duties to our client and uphold the highest standards when it comes to ethics and the law. Integrity. We care about how we represent our clients and nothing is more important.

Fiduciary duties are described as: a real estate broker who becomes an agent of a seller or buyer, either intentionally through the execution of a written agreement, or unintentionally by a course of conduct, will be deemed to be a fiduciary. Fiduciary duties are the highest duties known to the law. Classic examples of fiduciaries are trustees, executors, and guardians. As a fiduciary, a real estate broker will be held under the law to owe certain specific duties to his principal, in addition to any duties or obligations set forth in a listing agreement or other contract of employment. These specific fiduciary duties include:

  • loyalty
  • obedience
  • disclosure
  • confidentiality
  • reasonable care and diligence
  • accounting

Any licensed real estate agent who is not a Realtor® does not have to follow this standard. By whom would you want to be represented?

So what is so different between residential and commercial real estate? 

Residential:

  • the buyer's ability to qualify is based on their job, their debt coverage ratio (of personal income to personal debt), their paycheck and ability to repay the loan
  • there are all sorts of different loans for residential buyers that are not available to commercial buyers, such as Government-Insured (FHA, VA, USDA), Conventional, Conforming (Fannie Mae, Freddie Mac), Jumbo 
  • Private Mortgage Insurance (PMI) is required if the loan exceeds 80% 
  • typically amortized over 30 years (with options for a 15 year), with fixed and adjustable rates (ARMS)
  • a residential mortgage is secured by the property
  • a residential mortgage is made to an individual borrower(s)
  • buying a house isn't as discretionary as buying a business. Of course, whether to buy or rent is discretionary, but the residential housing market is more of a necessity than a discretionary decision. What and where to buy (if not renting) is discretionary.
  • the value of a residential property is market value, what a buyer is willing to pay. 
Commercial:
  • the buyer's ability to qualify is based on the business's cash flow, the amount of a downpayment the buyer has, the amount they would have for reserves, the condition of the property might dictate more held for reserves 
  • there are fewer loan options, such as an In-House bank loan (Non-Government Insured), Government Insured such as SBA 504 or 7a, (Small Business Administration), USDA, there are Short Term and Equipment loans, and ROBS or Self Directed IRA which use 401k funds to purchase a hospitality property by a formed C Corporation.
  • commercial loans are typically amortized over 20 or 25 years and are only fixed for 5-10 years (unless secured by SBA and that portion is fixed for 20), rates are often 1-1.5 points higher than residential.
  • a commercial mortgage is secured by a lien 
  • a commercial mortgage is made to a business entity formed for the purchase where the individuals are guarantors of the loan (often a corporation and an LLC are formed, one owns the real estate, the other owns the business) 
  • buying a business is completely discretionary. Nobody has to buy a business. 
  • the value of a commercial business is based on cash flow, not 'the market'. In some cases, a buyer is willing to pay more than the value, because they see what potential the property has and are willing to risk getting a return on the future value.
It's all about the numbers...

Whether I'm representing a commercial or residential buyer, my fiduciary responsibility to my client remains. Every buyer matters, every house or lodging property matters, and the success of our industry matters. Realtors® do our best to ensure the consumer comes first.

Wednesday, February 15, 2017

SOLD! Atlantean Cottage Inn in Bar Harbor, Maine

A stunning architectural gem in Bar Harbor transferred ownership today. Atlantean Cottage is a Fred Savage design built in 1903 as his personal residence. The Tudor Revival features classic half timbers, a buttressed front terrace and granite block foundation from a local quarry.

Atlantean stands today as a reminder of Mount Desert Island's rich history.





I represented the sellers, Gary Rich & Heidi Burnham and Rick Wolf, also of The B&B Team represented the buyers, Nadine Pinto and Brad Ipsan.

The B&B Team is proud to have been involved with this sale and welcome Brad and Nadine to the world of Innkeeping hospitality!

Atlantean was offered by The B&B Team for $1,800,000.



Friday, February 3, 2017

New Inn Listing in Bar Harbor!







Beautiful 17 room inn, all spacious with private baths, most with fireplaces and decks and some with jetted tubs. Fantastic in town location, parking, seasonal operation, very strong numbers. Check out the listing page on my website for more details and contact me with any questions!

Offered at $2,395,000