All Bed & Breakfasts/Inns are unique by design; in fact, it is
that unique quality that separates one Bed & Breakfast/Inn (B &
B/Inn) from the next. Innkeepers invest their energy and capital
over time to create a welcoming and hospitable environment that is
unique to their community and valued guests. While the charm and
ambiance of an inn add to a patron’s experience, such intangibles
have only an indirect effect on the actual value.
An Inn’s market value will ultimately be determined by combining
the values of the real estate with the business value i.e. cash
flow, good will and sometimes furniture, fixtures and equipment
(FF&E). It is important that you are comfortable with this value
before making an Offer to Purchase or a Contract of Sale.
Realtors who specialize in marketing and selling Bed &
Breakfasts/Inns have access to comparable sales data and property
specific financial information that should support the asking
price and may be made available to “Qualified Buyers”.
An accountant or industry consultant should be consulted to
analyze the financial data to be sure that income from the
property can support the debt service relative to the down payment
and your investment objectives.
The Contract of Sale
is the controlling document in a purchase and should reflect terms
that are practical relative to the down payment and the financing
terms for which you are best qualified. The value of the
business’s “Good Will” and FF&E may be assigned separate values
from the real estate in the Contract of Sale. Try to avoid this if
possible as loan programs that accommodate financing anything
other than real estate are less flexible and sometimes difficult
or expensive to obtain. It is always a good idea to consult your
lender before entering into a Contract of Sale, since a lender who
is familiar with bed & breakfast properties can pre-qualify you
and the property.
Most Contracts of Sale contain a mortgage contingency clause of 30
to 45 days, the exception being cash transactions, 1031 exchanges
of equal value or sales where the seller has agreed to be the
primary lender. The contract will also contain inspection clauses
for items such as insect infestation, plumbing, HVAC, electrical
and the structural integrity of the building(s). During this
‘due-diligence period,’ it is also common to incur attorney fees,
survey fees and title fees. It is therefore important to note,
that should the appraised value be determined to be less than the
contract sale price, the appraised value will be used to determine
the actual loan-to-value, rather than the contract price. If this
should occur and the parties cannot agree on a revised value or
contract terms, the buyer risks losing all or a portion of his/her
due-diligence expenses.
Your lender will require and order an appraisal of the property;
appraisal fees range from $2,400 to $4,000 depending on the nature
of the property and customary charges in a given geographical
area.
Down Payment
may be as little as 10% for qualified buyers,
although interest rates typically increase proportionate to the
Loan to Value (LTV). Funds from 401ks or IRAs can be used as a
down payment on a B & B/Inn. The programs are quite complicated
but can be managed professionally by a qualified plan facilitator.
Resumes
will be necessary on purchases for all partners with an interest
greater than 10%. A resume containing experience in the
hospitality and/or restaurant industry will be extremely
beneficial, as the lender must determine that the borrower’s work
history is sufficient to maintain and/or improve the cash flow of
the business.
Credit Scores
are extremely important to a lender in evaluating the merits of a
loan. Your credit (or FICO) scores have a direct impact on the
rate, term and loan program you for which you qualify.
Financing Overview
Because each property is unique in some way so then each financing
option must be analyzed carefully as to which financing programs
are available in your state and what financing options you will
have for the property you desire to purchase. A Conventional/Full
Doc loan application package will contain such information as the
Contract of Sale, 2 to 3 years business tax returns, an interim
financial statement, bank statements and in some cases a business
plan. In addition, for all partners with an interest greater than
10%, a credit profile, 2 years personal tax returns and resumes
will be required.
The following is a brief overview on the various aspects of
commercial financing:
Seller Financing
has long been common to the Bed & Breakfast industry for the
following reasons:
1. The business has income, but the Bed & Breakfast’s/Inn’s
financials show a modest profit, or even a loss, and will not
support the debt service on its own.
2. Banks local to the property may not understand the industry
because they are not comfortable with the industry and or the
business itself.
3. The concentration of Bed & Breakfasts/Inns in a particular area
may be insufficient to develop the comparable sales data.
4. The borrower’s resume does not contain the skill sets that
would give a lender confidence that the borrower has the ability
to manage and maintain the business going forward.
5. The combination of the buyer’s down payment and the loan amount
of the first mortgage falls short of the asking price or appraised
value. Before non-bank lenders, if a local bank would not lend on
a B & B/Inn, seller financing was the only way to facilitate a
transaction. Seller financing still has its place in some
transactions, as it broadens the pool of potential buyers and, in
fact, may be the last and only way to consummate the sale.
Banks
commonly take an interest in business ventures within their
defined trade area, provided the financials support the
contemplated level of debt service. A bank’s ability to lend on
properties that do not cash flow the debt service on their own is
often restricted. The FDIC, which insures bank deposits,
regulates lending policies and generally requires the entity
borrowing the money to repay the debit based on the cash flow from
the primary asset. To strengthen a loan request, the bank may seek
additional collateral and they generally require that the borrower
provide updated financials each year so they can monitor the
ongoing financial health of the business. This requirement
becomes an issue only when he required Debt Service Coverage Ratio
falls below an acceptable pre-determined level. Failure to
maintain this ratio may cause the bank to call the loan.
Banks often like to re-set rates from 3 to 5 years—and sometimes
even annually; depending on the direction interest rates are
heading at the time, this may or may not be an advantage for the
borrower. More often than not, amortizations are limited to 20
years or less.
Non-Bank Lenders
like Commercial Capital Network (CCN) offer a wide variety of loan
solutions to borrowers who were previously considered to be
un-bankable. Conventional/Full Doc Programs are available with
down payments as low as 10% and fixed rates from 2 to 30 years.
All sources of income may be considered to offset shortfalls in
the business’s cash flow including: W2 or 1099 income from any
partner, investment income, Social Security, Disability, etc.
Annual financial statements are NOT required and loans are often
assumable, which depending on interest rates at the time you
decide to market your B & B/Inn may be a big benefit to both you
and your buyer.
Conventional “Full Doc” Loan Program Highlights
• Income from all sources considered to qualify
• 2 Years Business and Personal tax returns required
• Pre-Approvals in 48 Hours
• Closings in as few as 45 days
• Amortization terms up to 30 years
• Loan Amounts to 90% LTV
• Yearly Financials are not required
• Loans may be assumed
Stated “No Doc” Loan Programs
are also available for purchase with only 15% down. These programs
are quick and well suited for Aspiring Innkeepers who are unable
to fully document their income, or where income from all sources
is inadequate to qualify for the loan. Please note these loans are
real estate-based loans, which means the sale of the business and
FF&E listed in the Contract of Sale cannot be financed and must be
covered by the down payment.
Stated/”NO Doc” Loan Program Highlights
• Tax returns may are not required
• Pre-Approvals in 48 Hours
• Closings in as few as 45 days
• Loan terms up to 30 years
• Loan Amounts to 85% of value (LTV)
• Yearly Financials are not required
• Loans may be assumed
SBA FINANCING OVERVIEW
The 7a Program
allows for financing of all types of business needs from
purchasing real estate and fixed assets to working capital,
business acquisitions and leasehold financing.
SBA's 7(a) Loan Guaranty Program offers the actual lender, Bank or
Non-bank, a loan guarantee up to 75% of the loan amount. These
Bank and Non-bank lenders are called "participants" as they
participate with the SBA in providing funds to eligible
borrowers. When a loan is offered under this program, 75% of the
funds are guaranteed by the SBA in the event of a default. The
SBA guarantees or insures the lender against loss resulting from
a default and collateral shortfall. This guarantee allows the
lender to provide for financing not ordinarily offered using
conventional policies.
The SBA 7(a) loan program highlights are:
The SBA 504 Program
provides a method to finance real estate expansion projects
through long-term, fixed-rate financing and is differentiated from
the 7(a) program in that it is offered in partnership with
a participating lender (Bank or Non-bank)."
