Monday, July 22, 2013

New Listing near Acadia National Park! Clark Point Inn, Southwest Harbor, Maine

Clark Point Inn has 5 guest rooms, a desirable location and very nice harbor views! More details are on my website.

NEW listing in Portland, Maine! Inn on Carleton in the West End

Located in the desirable West End historic district of Portland, this inn offers a financially viable business, a beautiful outdoor living space, a stellar reputation and lovely interior guest and owner's space. Offered at $1,575.000. Visit my website for more details.

Wednesday, July 17, 2013

Gross Income Should Not Include Lodging Sales Tax When Talking Value!

When our guests pay for their full stay, we include our local state sales tax. How this translates in accounting terms is that the cost of the room is revenue earned and the state lodging sales tax is a liability. The tax is not ours to keep, it's ours to pay to the state each month.

When brokers, lenders and buyers look at profit and loss statements during due diligence, we need to determine if the gross revenue includes the sales tax and if it does, there should be an expense line item for sales tax (payable) so that we can net it from the gross revenue collected. Sometimes the lodging tax is netted from the gross revenue collected when it's posted thus we never see it. Either way is acceptable, we just need to know in order to determine the gross revenue net sales tax when analyzing value.

So why is it so important to net the sales tax from the gross revenue? There are a few reasons. One of the methods of business valuation used is a GRM (gross revenue multiplier) and another more heavily used is a capitalization rate (cap rate). If the gross revenue is inflated by including the sales tax, we don't have a true sense of the real revenue. And since we take the gross revenue and multiply it by the recent GRM (taken from other sales), it would be falsely inflated if it included sales tax. However, since the cap rate is calculated based on the NOI (net operating income), it is not affected by including sales tax in both the revenue and expenses because the sales tax is a wash in this calculation method.

For example:
If ABC Inn is listed for $1,050,000, has a gross income of $214,000 (including sales tax) and NOI of $90,0000, sales tax collected is $14,000. Let's assume the recent GRM is 4.5 and the recent cap rate has been 9.5%. Doing some cursory calculations, here's what we end up with:
GRM = $900,000 (net sales tax)
GRM = $963,000 (including sales tax) 
Cap Rate = $891,000 

You can see that the assumed value of the inn in this scenario is based solely on the GRM including sales tax is over inflated by $63,000 when the sales tax is not ours to keep, so there should never be a value placed on what is not ours.

We also see that the cap rate and the GRM (net sales tax) are very close in value and within 85% of list price, so it would seem that the list price based on these calculations is a reasonably defensible list price.

But it's up to the lender and appraiser to make the final determination of value. But this information is valuable for you to use when doing a quick evaluation to know if the numbers are within a range of where you need them to be, either as a buyer or seller.

Remember... this is still

Wednesday, July 10, 2013

P&L vs. the Corporate Tax Return: the Tax Return Is KING!


Each of these income producing lodging businesses is just that, a business. And let's face it, when it comes time to prepare the business's tax returns, we naturally try to deduct as many expenses as we legitimately can to reduce our tax liability. 

But when your property is on the market for sale, minimizing the net income on the return should no longer be your focus, rather the complete opposite should be your focus. When a lender analyzes your business, the tax return is KING. During the buyer's due diligence, the profit and loss statements are often provided to the buyer to understand how the business operates, but the lender uses 3 to 5 years of tax returns to analyze the business value. In essence, they start with the net income, add back amortization and depreciation and come up with a revised NOI (net operating income) with which the buyer has to cover their mortgage with some amount of cash left to live on. Quite often the P&Ls show a higher NOI than the tax returns because of deductions taken. The lender may take certain deductions and seller explanations into consideration when determining value, but the tax return is still KING!

The same way we discuss with our buyer clients their future exit strategy (which could be well down the road), innkeepers should consider the impact of their tax returns when thinking about selling and eventually, their exit strategy. At some point during your ownership of the business, a gradual transition from claiming as many deductions as possible to showing a greater bottom line is something to discuss with your accountant and your lender. Your lender can give you an idea of your business value at any time and your accountant will inform you of the tax implications of shifting your focus on the bottom line. This may cost you some along the way, but the value of your business in the end could have a much more beneficial impact when your buyer's lender orders an appraisal. The greater your NOI, the greater your business value and potential sale price. Just something to consider...