Sunday, April 27, 2014

Going Concern Value - Inn Valuation

An inn or bed and breakfast is a hybrid. Yes, it is a business that operates within a piece of real estate on a piece of land. But it is a commercial business with a residential component. So how does an appraiser go about valuing this hybrid business? It's not always easy for the buyer and seller to fully understand. So I'll try and simplify it.

There are several elements that make up business value: hard assets are land, building and furniture, fixtures and equipment (FF&E). Intangibles are goodwill, such as trade name, reputation, guest/customer base, repeat clientele, well established long term business, intellectual property, etc. These all have value, but are not a hard asset. Intangibles cannot be sold off like the land, building and FF&E can, but they certainly can have great value to the operation and performance of a business. But the components that make up the goodwill have very subjective values.

We talk about a business as a "Going Concern", which is the value of a company as an ongoing entity. This value includes the liquidation value of a company's tangible assets (land, building, FF&E) as well as the present value of its intangible assets (goodwill). The going-concern value is worked into the purchase price of a company, and is the main reason why the purchase price of a company tends to be higher than the current value of the assets of the company.

There are three different approaches to value, and the results are often weighted as a combination of two or three. They are "income approach", "cost approach" and "comparative market value approach".

So let's use the following example to talk about the income approach:

ABC Inn is under contract for $1,000,000. Based on standard commercial B&B lending, buyer puts down 25% of contract price, lender funds 75% loan to value.

"ABC Inn Appraisal Report  - Market Value, Fee Simple, as a Going Concern"
Appraised Market Value: $1,000,000, allocated as follows:
Hard Assets:
       Land/Building: $775,000
       FF&E: $25,000
Goodwill: $200,000
The bank will loan 75% of hard assets and FF&E (of $800,000). This translates to:
       Bank loan: $600,000
       Buyer down: $250,000 (25% of contract price)
       = $850,000 but the contract price is $1,000,000.

So who is going to fund the difference of $150,000?  The banks don't usually lend on goodwill or intangibles, simply because if a buyer defaults on the loan and the bank has to turn around and liquidate the assets, intangibles cannot be sold, only the hard assets can. So who's left to fund this? If the business performance qualifies, SBA might guarantee the goodwill portion of a loan which will allow the lender to fund the guaranteed portion of goodwill. If not, often a seller is asked to carry a note for the difference, or a buyer realizes what the goodwill is worth to them and they fund it, or a combination of both. But you can see how this could bring about a financing hiccup if a considerable portion of the appraised value is allocated to goodwill. The better the business, cash flow, and the reputation, the higher the possible goodwill value. Which means, the higher the cost to buy into this lifestyle business.

This is nothing new in commercial hospitality lending, but it's something that is being enforced possibly more than it was years back. Is this the new lending climate? We really aren't sure, but it appears it could be trending that way. So it's just something that buyers and sellers need to be aware of. Just another reason to work with an experienced broker.

I'll save HOW an appraiser arrives at the amount allocated to goodwill for another post!

Saturday, April 12, 2014

Easy Bathroom Updates!

Are you thinking of selling your bed and breakfast or did you just buy one or are you looking to? These are some easy ways to add value for your guests as well as your potential buyer. Many bed and breakfasts are often limited to upgrades due to cash flow and space constraints. So consider these inexpensive updates for high impact results without damaging your net operating income!

Brass trim can tend to look dated. Special spray paint can easily fix that!

Beadboard and chair rail can dress up a small bathroom but can get expensive. Try this visual trick with wallcovering and chair rail!

Talk about an easy update?

Laminate wood floor in a bathroom not only looks and feels warmer than tile (and is much less expensive) but without grout to keep from staining, it's ideal for a bed and breakfast!

Tuesday, April 8, 2014

SOLD! Ducktrap Motel in Lincolnville, Maine

Another Maine hospitality property just changed hands! A wonderful 13 room motel/cottages just a couple miles to Lincolnville Beach. Congratulations to new buyers Reesa and Scott and to my sellers, Rick and Elaine. I wish you all the best in the next phase of your lives!

Thursday, April 3, 2014

Clarifying Brokerage Relationships.......

The word 'clear' isn't often synonymous with the understanding of brokerage relationships, regardless of how we try to explain it (clear as mud, perhaps?). But it's so very important that I find myself constantly looking into ways to ensure that it makes sense to our customers.

So let's talk about it for a bit....and yes, this is probably going to be my lengthiest post ever but it's important!

When you, as a customer, whether buyer or seller, contact a real estate agent, you have questions about a property. As a customer, there are limitations as to how that real estate agent can respond, depending on whether they are a listing agent for a seller or if they are just an agent whom you've contacted to ask about another agent's listing. And to complicate matters, it also depends on what type of 'agency' the brokerage company practices. Clear yet? I didn't think so!

When you are a "Customer"(which means you haven't entered into a brokerage representation agreement and aren't yet a "Client") a real estate agent owes you:
HONESTY to treat buyer and seller honestly and not knowingly give false information
DISCLOSURE to disclose all material defects of real estate that are known to them
ACCOUNTING to account for all money and property received from or on behalf of a buyer or seller
COMPLIANCE to comply with state and federal laws related to the real estate brokerage activity

In a Customer-Agent relationship, as a buyer you can still make offers and enter into brokerage activity, however you are limited as to what your agent can do for you. Your agent essentially acts as a facilitator and not an advocate. Your agent performs ministerial acts that are informative or clerical in nature but not advisory. Most importantly, your agent cannot advise you. Advice is only permitted under a brokerage agreement.

When you become a "Client", you enter into a brokerage representation agreement. Your agent becomes a "fiduciary". A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. A fiduciary duty is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the "principal"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents. (Wikipedia)  Your agent now owes you, the Client, in addition to the duties noted above (for a Customer) certain fiduciary duties. They are:
LOYALTY to act solely in the best interests of the principal
OBEDIENCE to promptly and efficiently obey all lawful instructions of his/her principal
DISCLOSURE to disclose to the principal all known relevant and material information
CONFIDENTIALITY to keep confidential any information that may weaken a principal's bargaining position
REASONABLE CARE & DILIGENCE to use reasonable care and diligence when pursuing the principal's affairs
ACCOUNTING to account for all money or property that belongs to his/her principal entrusted to that agent

As you can see, the primary difference between the two roles is the loyalty and confidentiality. And these are the two duties that are key in negotiating on behalf of a client.

So, a real estate agent can't advise or advocate for anyone but a Client. Therefore, the questions to you as a buyer are: do you want to rely on an agent for advice, loyalty, advocacy, etc, to promote your best interests? Or do you just want an agent to act as a facilitator while you look out for your own interests? That's probably the simplest way to look at it.

Now, if I have been able to clear the mud off Customer-Client relationships, let me muddy things back up by talking about Disclosed Dual Agency (let's refer to it as DDA)! DDA is when an agent represents both buyer and seller in the same transaction whose interests are adverse. Buyer wants the best terms and lowest price and seller wants the best terms and highest price.

A Disclosed Dual Agent cannot advise one party to the detriment to another.

  • DDA cannot disclose a buyer's motivation for buying 
  • DDA cannot disclose a seller's motivation for selling
  • DDA cannot disclose a buyer's top dollar they're willing to pay
  • DDA cannot disclose the lowest price a seller is willing to accept
Sounds like a bit of tug of war, doesn't it? But in commercial lodging deals, it doesn't have to be.  Let's look at an example: if I am a listing agent for ABC Inn and John Doe calls me (and isn't working with his own agent), he may ask as many questions as he wishes, how I respond is completely up to the brokerage relationship I have with my seller. And since I have an exclusive right to sell listing agreement (we'll refer to it as the listing agreement, or LA for this purpose), my seller is a Client and I have those fiduciary responsibilities to my Client. I am solely looking out for my client's best interests. But what if John Doe happens to currently be one of my current Clients with whom I have a buyer representation agreement, and John Doe expresses interest in moving forward with a purchase of ABC Inn, what happens next? IF the parties agree, in writing, I can become the DDA. I can advise them both, but not to the detriment of either. So I am a referee of sorts!

In commercial business transactions, there is goodwill that transfers along with the real estate. And in lodging deals, there is quite a bit of involvement and cooperation between buyer and seller as settlement approaches, with training often being the most important one. Sellers are often emotional when facing saying farewell to a business they've carefully fostered over the years and they want the buyers to do well and to carry on the tradition and wish success for their buyers. You're probably thinking that's a whole lot different from a residential real estate transaction and you're right! A DDA is also the one person who can talk with both buyer and seller's attorneys and accountants to convey information. And because there's a lot more involvement of these professionals, that can really help to keep the deal moving along smoothly. 

But rather than looking at it as two opposing sides, look at it as one agent being able to bring both parties together in one transaction. And in the end, if both buyer and seller agree on a price and terms that they can both live with, have I not done my job as a DDA? A DDA must be very careful about what they say and how they say it. Ethics and the law are very important and I take that very seriously. I also value my name and reputation that I've built over the years. As a DDA, I'm going to do everything in my power to bring the parties together, fairly.

I could go on but let's limit this post to Brokerage Relationships 101......... and you've probably had enough!

SOLD 4/2/14!! Acadia Cottages in Southwest Harbor, Maine

Congratulations to buyers and new innkeepers, Tom and Vickie and to sellers Lisa and Gordon. We wish you all the best of luck!

The B&B Team was pleased to represent both parties in the transaction. I represented the sellers and Eliot Dalton represented the buyers.


Tuesday, April 1, 2014

New Price on a Camden Maine Inn!

Now offered at $995,000, this is a beautiful Camden B&B with a view of the Penobscot Bay. Lovely and spacious owner's quarters are done in the style and decor of the rest of the inn, so innkeepers feel just like the guests at the inn. Enjoy this seasonal business, water views, Camden lifestyle and a mid-coast location on the popular Route 1 that's under 2 hours to Bar Harbor and Acadia National Park and under 2 hours to Portland. Visit the listing page on my website for details.