Oct 19th, 2010
The Value of Appraisals/Valuations Prior to Marketing Your Inn
By Rick Newman, Managing Partner of Commercial Capital Network, LLC
The BIG Picture: All Bed & Breakfasts/Inns are unique by design; in fact, it is that unique quality that separates one Bed & Breakfast/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 commercial market value will ultimately be determined by evaluating the values of the real estate, 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”. The concentration of Bed & Breakfasts/Inns in a particular area may or may not be insufficient to develop the comparable sales data that will be acceptable to a lender. A lender familiar with the industry, an accountant or qualified industry consultant’s services should be used 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 to obtain. It is always a good idea to consult with a knowledgeable lender before entering into a Contract of Sale, since a lender who is familiar with bed & breakfast properties can pre-qualify you specifically to the property you have identified.
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. It is also worth noting that when a property’s value as determined by a qualified appraiser is less than the contract price the parties to the contract may decide to re-negotiate the sales price and modify the contract accordingly; however, since appraisals often take thirty days or more to complete, the parties and their agents may find it challenging to work through their respective issues and ultimately the seller may decide they will not or cannot accept the lower value.
Conclusion: In the end, determining the value of your business could save all concerned time, money and the anxiety associated with the unknown. The real benefit is that Innkeepers and their realtors can market the property with confidence by having a qualified valuation or appraisal available to share with qualified buyers, their advisors, realtors and ultimately, a lender.
Note: Most lenders will only accept an appraisal if dated within six months of the date on the appraisal, it may also be acceptable to the lender to have the same appraiser update the appraisal which is deemed out of date which will save the buyer time and money.
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