Saturday, December 13, 2014

A "Start-Up" vs. "Going Concern" Bed and Breakfast...The Difference, Explained.

Every now and then we find the most spectacular piece of architecture and immediately think "WOW, wouldn't THAT make an amazing bed and breakfast!" 

This photo (and below) was taken by my friend Trisha when she was recently in Eureka, CA. Her brother is a photographer and does a lot of work with B&Bs. This is a STUNNING example of a high Victorian, would you agree? It would make a spectacular lodging property! Well, this one is. But this thought is common for those looking to get into the hospitality industry. 

Some of these grand historic private homes exude the essence of a classic bed and breakfast. And aspiring innkeepers get emotionally caught up in this dream of converting an historic home into a hospitality lodging property. The idea that you can make it your own from day one, I'll admit, is very appealing. So what does it take? Other than money?

Well, it takes money. A lot of money. And risk. Often a lot of risk. But it also takes a vision, passion, a long term plan, a strong marketing sense, and possibly most importantly, a real sense of what the guest wants out of this, not what the innkeeper wants. If money is no object, then by all means, call me and let's find your start-up!!!

When we see a property like this (of any size, really), we become emotional about wanting to live in such a piece of architecture. About renovating it. About providing the WOW factor for our guests. But what experience is in it for our guests? The area has to be a draw, not the house. If the area isn't the draw, the house has to be more than just WOW, it has to become the destination. This might mean a full service inn with dining, depending on what's around. It might require even more than that. But the point is, try not to fall in love with a home first. Try to fall in love with an area that makes sense. Then fall in love with a home in that area. 

So, you've determined you have what it takes for a start-up. Other than reaching out to an experienced lodging broker, you'll want to talk with a lender or two, well versed in the lodging and hospitality industry. You'll look at the cash you have to inject into this venture, your financial background and the lender will give you a sense of their willingness to lend, based on their assessment of risk. You're probably thinking that you have the downpayment required for a private home (5-10% maybe?) but if you're applying for a residential loan, you need to have the income to support that debt. Since your business is a start-up, it does not yet provide income to support the debt, nor does it provide you a paycheck, yet. So what is the source of your income to pay the debt? If it's cash, how long will that cash last? Is it a job you can retain while starting your inn? 

And consider renovation costs; many times these homes have several bedrooms but not as many baths and in today's world, private baths are the only way to go (there can be a room with a private detached bath but it's still only recommended if you have no other option). There are then business start-up costs, after the physical renovation costs. And you'll need to consider the regular monthly operational expenses required. And advertising a new start-up is going to be a big expense in order to compete with the established inns around. How long can you cover such expenses before your business income can support them? The lender will want to see this in detail. And the area has to support your projections for occupancy. It could take several years before your business cash flows and you have to be prepared with the cash reserves because the bank won't be.

When it comes to an existing bed and breakfast, or "going concern", the cash required for financing is essentially your downpayment (roughly 25% for a commercial loan), some cash reserves for deferred maintenance, enough to cover the expenses and debt service and to provide you with a modest paycheck (see several blog posts about DCR, Debt Coverage Ratio, Going Concern, Commercial Financing). This is often a much less risky road to take if there is historical income and a proven track record that you're just trying to either improve or just continue status quo. And sometimes in the end, it might cost less to renovate an existing business to make it your own than buy a stunning home and start from scratch. When it comes to bank financing, unless you have a lot of money, a going concern is the way to go.

Just some things to consider!

Thursday, December 11, 2014

BUYERS TAKE NOTE: MOTIVATED SELLER - Jolly Drayman Pub and Briar Lea Inn in Bethel, Maine

Currently offered at $595,000 (and the numbers work at this price), this is a buyer's opportunity to get in at an even lower price.

The Briar Lea Inn and Jolly Drayman Pub offering is one of the best opportunities on the market. This is a highly successful and lucrative turn key inn/pub  business with tremendous growth opportunity.  The owners must sell and are willing to seriously negotiate.  This is a wonderful lifestyle in the beautiful, year round Maine town of Bethel.

  • Highly profitable
  • Turn-key
  • Spacious commercial kitchen
  • Easy to manage/ownership - the pub is only open 5-9pm, so not a huge food service business to undertake
  • Significant growth opportunities
  • Significant pub tips
  • Mountain location provides for attractive year round business
  • Fantastic private owner's 2 bedroom, 2 bath apartment with new kitchen, granite and hardwood 
Visit the listing on my website for more details, links to photos, etc.

Tuesday, December 2, 2014

As a lodging and bed and breakfast broker I wear many hats...What's really involved in a commercial deal?

Clients texted me a few weeks ago and during our exchange of texts they acknowledged (and fully appreciated) my role not only as broker/advisor, but as a counselor, coach, cheerleader, human resources director, business consultant, financial services advisor, restaurant and wine advisor (okay, not really imperative) but you get the point! And I'll add 'puzzle master' as there are many pieces of a commercial deal that have to fit together.

Most importantly, these roles help me relate to my clients on a personal level. I've been through every step, as an aspiring innkeeper looking for inns through financing to operations, to broker having sold the inn, so I can relate on the emotional level. So much of my role is guiding clients through the many steps of this business and real estate acquisition.

Helping clients remain calm and focused while navigating the maze from start to finish makes a big impact on their experience.

We just received notification that the appraisal came fine! And in commercial deals, waiting on a commercial appraisal can be extremely stressful. But that's another blog post topic entirely. Here was our text exchange after receiving the lender's email (although the deal had been going pretty well, we agreed not to fist pump until satisfactory appraisal!):

To give you a sense of what's involved in a typical lodging transaction (not necessarily in this exact order):
  • buyer looks at property (or several)
  • with further interest, buyer requests financial information (sometimes prior to the showing)
  • buyer and broker perform cash flow analysis to come up with what debt it could support
  • often buyer then sends the cash flow analysis and their personal financial details to several lenders to obtain proposed terms
  • buyer makes offer based on their available cash (commercial loans require 20-30% down as a rule of thumb) and cash flow analysis (business value)
  • buyer engages a real estate attorney
  • buyer works on/finalizes business plan with projections several years out on how they're going to operate and increase the business value (so they make money when they sell)
  • buyer submits loan application with business plan and personal financial information to their lender of choice (who offered the best terms)
  • within a week or hopefully no more than two, lender gives a "commitment letter subject to appraisal" and buyer sends a check for the appraisal (which is often in the $3k range for a commercial appraisal) The commercial appraisal process can take 4-8 weeks. There have been times where an appraisal may not come in until a week or two prior to scheduled closing
  • buyer seeks a professional building inspector to perform the complete building inspection. If the inn is open for business, this has to be coordinated around guests. Buyer comes in for inspection (often from out of town)
  • buyer continues with due diligence, inspecting business records, town records, code enforcement, etc. 
  • buyer may have a house to sell - house has to be put on the market and sold by a certain date per the Purchase and Sale Agreement. But what if the terms on the buyer's purchase end don't coincide with the terms on the buyer's house sale end? The buyer needs to know that they won't be forced to sell if their purchase end falls through, etc. These things have to be coordinated to protect the parties every step of the way
  • If buyer has a job they for which they need to give ample notice, coordinating the timing of that notice at a point where it's safe on the buyer's purchase end, where they're fairly certain the deal will go through. What if it falls through and they've given notice? Another step where timing is essential to protect the parties' interests
  • buyer has to apply for the required state and/or municipal lodging or operating licenses, often requiring 30 days or so to receive the license
  • buyer has to form a business entity (a corporation or LLC) prior to closing
  • buyer must have a property and liability insurance binder in place just prior to closing
  • buyer should engage with an accountant experienced in the hospitality field - at some point during the process, the parties will have to negotiate an "allocation of assets" which becomes the buyer's basis for depreciation schedules and future tax returns and an accountant is best to advise the parties. The allocation of assets means if a property sells for $xx - the full amount is broken down into building, land, furniture, fixtures and equipment (FF&E), intangibles (goodwill, trade name, website, etc) and possibly a non-competition agreement. Each of these has value and affect the parties differently
  • buyer typically gets some amount of training pre and post closing which has to be coordinated (website, reservation system, vendors, employees, inventory - all of this has to be considered)
  • seller has to move out to be able to hand over the premises the day of closing. Buyer has to coordinate moving in. What if the inn is open for business at the time of settlement? That takes careful coordination and goodwill between the parties if the buyer has guests arriving the day of closing. And what if there are guests just up until the day of closing? The seller needs to take care of the guests and move their belongings out! It can be worked out, it just takes coordination and cooperation
Nearly all of these points have a performance date associated with them in the purchase and sale agreement. I help my clients stay on track of what they need to do and by what date. 

I think it's fair to say that a residential and commercial transaction are like night and day. It takes a  well qualified broker/consultant/therapist/cheerleader/counselor/financial advisor/puzzle master to successfully bring a deal like this to fruition and to maintain a great relationship with the client, even beyond the settlement table. Check out my testimonials from past buyers and sellers.

I feel obligated to mention that my clients excluded "computer maven" from my roles as I must have some electromagnetic field that interferes with electronic devices. [See MacBook Pro screens below. I eventually replaced the computer]

I may not know the hardware side, but the applications, programs, spreadsheets, desktop publishing, marketing and social media? Yeah, I GOT THAT COVERED!