|
Re-financing a B&B/Inn…
Contrary to the media’s coverage on the financial markets and banking,
mortgage financing is available for bed and breakfast/inns, where the
business tax returns show sufficient cash flow to service the debt necessary
to refinance/re-organize the innkeeper’s current debt.
The
debt service on a commercial loan must be serviced by the income generated
from the property only; income from other sources such as employment outside
the inn cannot be used by the Loan Analyst to offset losses in the operating
income from the inn. The Loan to Value (LTV) is established based on the
actual “appraised value” as determined by an appraiser who is approved by the
lender. The actual loan amount will be determined by the Loan
Analyst/Underwriter, based on the historical record of income and deductions
from the tax returns not the P&L’s. Generally speaking, the only add
backs to the bottom line on the business tax returns are: Officer’s Salaries,
Mortgage P&I, Depreciation, Rent, and One Time/Non-Re-occurring Capital
Improvements.
A purchase transaction is underwritten in the same way as a refinance when it comes to
the cash flow of the property; however what can be an issue in these times
that the buyer’s down payment must be sufficient to cover the difference
between the Loan to Value (LTV) and the sale price or appraised value
whichever is greater. The losses perspective buyers have recently
experienced in the stock market, their 401k/IRA’s and or equity in their
homes, equates to a reduction in cash/equity they have available for a down
payment, this reduction in purchasing power will necessitate seller financing
or a shift to less expensive Bed & Breakfast/Inn.
Tax Returns are everything….
It is all too common to the industry that Innkeepers will run every expense
they can through the business to reduce their taxable income, this practice
may work from a tax perspective but can make financing the inn these days
extremely difficult or even impossible
P&L Statements may be
used by a perspective buyer and his/her advisors but lenders use tax returns
when underwriting a loan request; P&L’s are only used by the Underwriter to
cover the Year to Date (YTD) as the return has not been filed.
Residential loans for bed and breakfast properties….
Income or mixed use properties whether zoned residential or residential with
a “Special Use Permit” are considered commercial because they have a
commercial use and they generate income. Most bank and non-bank lenders sell
residential loans on the secondary market, since an operating bed &
breakfast/inn does not conform to the restrictions imposed in the
secondary market the loan does not conform to the residential loan
requirements. The other factor which disqualifies most buyers from qualifying
for a residential loan is that income from the inn cannot be used to qualify
for the loan, the buyers income from other sources must be sufficient without
considering the income generated by the business.
2009 – May not be much better….
Innkeepers
wishing to refinance or sell their inn in 2009 may want to take
the opportunity to re-visit their tax strategy for the preparation of their
2008 tax returns. What lender in this market will finance an inn that
loses money, the short answer… not many and probably none. What buyer wants
to risk $3,500 to $5,000 on an appraisal valuing a property that will likely
under-appraise relative to the seller’s expectation of value or purchase a
property that shows losses year after year in spite of personal
representations made by the owner to the contrary, the answer… a dreamer, a
bottom feeder or a qualified turn-around expert?
Aspiring Innkeepers who have their hearts set on acquiring that “Fixer-Upper” or an
inn that has been falling short in the income department should think twice
before spending time and money on the due diligence process unless you
have the following going for you:
1.
A seller who realizes that an under-performing business is worth
less than a profitable one and has priced it accordingly.
2.
The seller is will and able to hold financing for any shortfall
between the appraised value, Loan to Value, and your down payment
3.
You will need 30% to 40% in down payment and cash reserves
instead of the customary 15% to 20% down on a property with a good financial
history
4.
Your resume must either contain direct hospitality experience or
transferable skill sets and qualifications
A Fresh Start for 2009 is what the industry needs. From an accounting prospective, what
we need is to
change the mindset from the “Mom & Pop” or “Lifestyle” approach to running
the business and letting the business strut its stuff. Help Realtors
establish a reality based asking price; help appraisers determine values on an income approach,
and give lenders every reason to say YES by supplying the ammunition they
need to successfully underwrite a loan request on a business that shows it
can repay the debt.
Step 1 Use the PAII recommended Chart of Accounts in the New Year, as
the
Industry desperately needs standardize accounting.
Step 2
Organize business tax returns knowing how a lender underwrites a loan
request. Again, the only add-backs to the bottom line of a tax return are:
Officer’s Salaries, Mortgage P&I, Depreciation, Rent, and Non-Re-occurring
Major Capital Improvements that increase revenue and add to the value of the
real estate.
Inns for Sale | Services
|
Wants/Needs |
About Us | Referrals | Seminars | Articles
| Links | Home
The Innkeeper's Resource™
The B&B Team®
Inn Consultants and Brokers Since 1993
Offices in Virginia, Maine, and Maryland
CONTACT US
www.bbteam.com
Copyright © 2001-2010 The B&B Team, Inc. All rights reserved
Some offices independently owned and operated
Website hosting by Blizzard Internet
Marketing, Inc
"The B&B Team" and the pineapple logo are registered trademarks
of The B&B Team, Inc.
The B&B Team's Privacy Policy
Legal Disclosures
| 