By Rick Newman of Commercial Capital Network, LLC

The last time interest rates were at present levels, the Howdy Doody Show was a daily favorite of  many of the profile/traditional buyers shopping for “The inn of their dreams”.  Couples who have   “Retired but are not Tired” are the typical buyer for bed & breakfast/inn properties. With the    unemployment rate looming at 9.6%, more and more of these semi-retired couples are discovering that they can find employment through the acquisition of a business and are beginning to discover the many opportunities that exist in the hospitality industry.  Many of these buyers have financial resources beyond just savings or equity in real estate; in fact it is a little known fact that retirement assets can be   used to acquire a business.

Most people believe that the only two options available to them if they want or need to access capital from their retirement plans are borrowing from the plan or terminating the plan all together.  While borrowing involves repaying the principal and interest, an early withdrawal may be subject to a pre-distribution tax and penalties.  Neither option makes sense for most investors but there is another way…

The Employee Retirement Income Security Act (ERISA), which created the IRA in 1974, places surprisingly few restrictions on how retirement money can be invested. Except for life insurance or collectibles—such as artwork or coins—IRA funds can be placed in just about anything. Tens of thousands of investors have switched their retirement savings to self-directed accounts since the stock market correction of 2000 and 2001. By some estimates, 3% of the $3.5 trillion held in IRAs is now in alternative investments and the number is growing.  To view the full article CLICK HERE

Are you an Innkeeper thinking of selling your inn? Since the value of commercial real estate is substantially based   on the income generated by the business occupying the asset, a seller should do all that is possible to maximize the    gross income and control expenses to achieve the largest Net Operating Income (NOI).  Refinancing current liabilities    may be desirable or necessary to fund improvements that will make your inn more desirable to perspective buyers and    will undoubtedly impact the value of the business.  If your exit horizon is within the next few years you will want to do all you can to enhance the value of your inn.

• Make sure your financials accurately reflect the businesses income and expenses
• Show all you can on the bottom line
• Add guest rooms to achieve the economies of scale and increase your gross income
• Expand facilities to accommodate events and increase the top line

Now is a great time to reorganize debt, make capital improvements or refinance a loan that is ballooning, adjusting or priced above prevailing commercial rates.   How long interest rates will stay at this level is anyone’s guess but many experts express concern over the future of our economy and the impact market conditions will have on long-term interest rates.

A  Reality Check for sellers and buyers alike: Business Tax Returns are everything when underwriting a commercial loan request.  The business   returns must document that the net income from the business alone can comfortably service the desired level of debt.  It is understandable that innkeepers reduce taxable income by deducting every justifiable expense they can, this practice may work from the owners’ perspective, but it can make financing an inn these days extremely difficult when the   business shows red ink.  Income from sources outside the inn can rarely be used by the Loan Analyst to offset losses in the operating income from the inn.

The loan amount and Loan to Value (LTV) is established based on the analysis of the business financials and the “Appraised Value” as determined by a full narrative commercial appraisal which has been conducted by an appraiser who has been approved and generally selected 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 or Rent, Mortgage P&I and Depreciation.

Good Planning produces positive results, so it is important to be well informed plan your moves carefully. The current real estate and financial markets, challenging and difficult as it is, can offer opportunities if you know where to look how to approach them and have the good sense to seek the advice and assistance advice from qualified professionals  such as accountants, lawyers, industry specialist realtors, industry consultants, appraisers and lenders.

CCN’s Verified Financials™ program is designed to provide Innkeepers and realtors a designation that can be used to instantly differentiate their hospitality property listing from other B&B listings on Industry Websites, Multiple Listing Services, and conventional advertising.

CCN’s Verified Financials^TM certification signifies that an independent evaluation of the inn’s business financials has  been conducted and that the historical income & expense documentation reconciles to its Federal Tax Returns.  Aspiring Innkeepers and their advisors understandably require copies of an inn’s financials to determine that the income from the inn will be sufficient to pay all expenses, service the desired loan and produce an acceptable bottom line relative to the ongoing financial needs of the buyer; the former must logically be determined before a well informed buying decision  can be made.     

CCN’s underwriting process examines the following to determine an acceptable range of debt relative  to the average of the historical business cash flow:

• Three (3) most recent years Federal Tax Returns
• Three (3) most recent Income & Expenses Statements
• Current Year to Date Income & Expenses Statement
• Prior Year Income & Expenses Statement for the corresponding period

CCN’s confidentiality policy and practices protects the ALL financial data and documentation.    CCN shall:

• Evaluate all financial documents and proofs necessary to issue its opinion on business financials as they relate to commercial financing
• Entitle the innkeeper/owner, agents or representatives to use the Verified Financials™ designation in all media and advertising

Note: Underwriting a commercial financing combines an analysis of both the business being acquired and the personal qualifications and assets of the principal/s seeking to purchase.

As an added benefit, CCN will confidentially retain this financial data and documentation; this service insulates an owner from sharing sensitive data with un-qualified prospects.   Once a Pre-Qualified Buyer™ has been identified; the property/business data may be combined with that of the buyer to efficiently underwrite the feasibility of a successful transaction.

CCN’s Pre-Qualified Buyer^™evaluation and designation, was designed to provide Aspiring Innkeepers  a credible way to quantify how much purchasing power they really have as it relates to identifying hospitality properties that best fit their financial qualifications and investment objectives.   The  designation, certifies that a review has been conducted according to generally accepted commercial underwriting guidelines, by verifying the identities, professional qualifications, personal assets, liabilities, income and credit of all partners who will have an interest greater than 20%, and has determined a range for which financing could be obtained assuming the historical performance of the business would support a reasonable level of financing  relative to its anticipated/appraised value.   

CCN’s certification process satisfies the concerns of both realtors and sellers, because it identifies a conscientious person or persons as having submitted the proofs and documentation necessary for verification prior to seriously entering the market.  The buyer’s qualifications can be well established and certified by CNN, so that potential buyers and their realtors have realistic parameters established to help them identify a property that fits their financial qualifications and investment objectives. 

CCN’s confidentiality policy requires CCN to keep confidential, all identities, personal data and documents, and shall only use same for evaluation purposes.  Once a qualified property has been identified, CCN may use this personal data to combine with property specific financial data to determine the viability of an acquisition relative to the objectives of the borrower/s.

Pre-Qualified Buyer™ services shall include:

• Evaluate ALL financial documents and proofs necessary to issue its opinion on personal  financials as they relate to commercial financing.   
• CCN shall Issue a Pre-Qualified Buyer™ Certification Letter which may be presented to realtors and Innkeepers/property owners
• Once a property has been identified, CCN shall provide an independent review of the business financials i.e. three (3) years Tax Returns and Income and Expense Statement (P&L) together with current year P&L

Aspiring Innkeeper’s… 2010 Financing Update!

By Rick Newman, Managing Partner of Commercial Capital Network, LLC

2010 will be a challenging time in the financial markets as bank and non bank lenders alike are forced to re-evaluate lending parameters to adjust to the pressures of the time.  The number of lenders has diminished in the last twelve months and the loan committees of the remaining institutions enjoy the luxury of an increase loan applications and the enviable position of lending to the most qualified buyers and the most desirable properties from a cash flow perspective.

The good news for Aspiring Innkeepers is what a great time to buy!  Rates are the lowest in many decades, you can access you retirement assets and roll them into a selfdirected IRA.   How long will rates stay at the present level is anyone’s guess but the 6% range for a 5 year fixed 25 year term makes for a very compelling reason to buy now.   High unemployment among middle aged individuals seeking a career change combined with low interest rates and large supply of available inns makes for an interesting combination of events providing a unique opportunity for Aspiring Innkeeper’s to get into the “Inn of their dreams” at prices, rates and terms that are unique to our times.

Aspiring Innkeepers who have their hearts set on acquiring that “Fixer-Upper” or an under performing inn, “A Gem in the Rough”, should consult with industry professionals as to the potential viability of the property and carefully evaluate the wisdom in spending time and money on the due diligence process unless you have the following:

1. A down payment of 20%
2. Cash reserves necessary to offset losses while increasing the cash flow from point A to point B in the business plan
3. A resume that contains direct hospitality experience or transferable qualifications
4. A seller who realizes that an under-performing business is worth less than a profitable one and has priced it accordingly.
5. A seller who is willing and able to hold financing for any shortfall between the appraised value or Loan to Value, and your down payment

Using 401k/IRA Assets to fund a down payment: For most investors, losses experienced in the stock market, 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 may require an investor to seek seller financing, a less expensive inn and or use their 401k/IRA assets to fund a down payment.   Few investors/entrepreneurs realize that they have the ability to finance the purchase of a business with retirement funds.   Most people believe that there are only two options available to them if they want or need to access capital from their plan/s.  Borrowing involves repaying the principal and interest and an early withdrawal may be subject to a pre-distribution tax and penalties.  To View full article CLICK HERE

Tax Returns are everything…. It is quite common for small business owners to reduce their taxable income by claiming every justifiable expense they can on their tax returns; this practice may work from a tax perspective but can make financing the inn these days extremely difficult.  P&L Statements may be used to make a buying decision, 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) if the return has not been filed.

Pre-Qualification: Commercial loan applications not only compile the data on the property, they also require a full disclosure of all personal assets and liabilities, credit qualifications, resumes and personal guarantees for all stockholders who will own 20% or more in the stock of the company.   To read Overview CLICK HERE

Business Plans are critical, and should be thoughtfully prepared to articulate a reasonable strategy for the business going forward.  If the historical financial data supports the desired debt service GREAT, if not well documented projections backed up by credible data sources and assumptions will be necessary to support the feasibility of the plan.  For a list of qualified professionals to assist you in drafting such a plan CLICK HERE

Innkeeper’s…   2010 Refinancing Update!

By Rick Newman, Managing Partner, Commercial Capital Network

Property Owners wishing to reorganize debt to make capital improvements or refinance a loan that is ballooning or adjusting would be well advised to begin the application process in the early part of 2010.
 

Rates are low but may not be for much longer… Interest rates seem to have hit bottom, but how long they will stay at this level is anyone’s guess.  Many experts express concern over the future of our economy and the impact market conditions will have on long-term interest rates.

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Note:  This material is being provided for general information purposes.  This overview is intended to alert the reader to the importance of managing his/her credit.  General guidelines, material and other information is being provided as a courtesy.  No representations or warranties are made as to the accuracy or processes covered herein.  The Credit Tier Examples listed below are for information purposes only, as lender guidelines vary.

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By Rick Newman, Managing Partner of  Commercial Capital Network

Few investors/entrepreneurs realize that they have the ability to finance the purchase of a business with retirement funds. Most people believe that there are only two options available to them if they want or need to access capital from their plan/s. Borrowing involves repaying the principal and interest and an early withdrawal may be subject to a pre-distribution tax and penalties. There is another way…

The Employee Retirement Income Security Act (ERISA), which created the IRA in 1974, places surprisingly few restrictions on how retirement money can be invested. Except for life insurance or collectibles-such as artwork or coins-IRA funds can be placed in just about anything. Tens of thousands of investors have switched their retirement savings to self-directed accounts since the stock market correction of 2000 and 2001. By some estimates, 3% of the $3.5 trillion held in IRAs is now in alternative investments-and the number is growing.

Here is how it works…

A new C Corporation will be formed and will sponsor a new 401(k). Your retirement funds are rolled into this new 401(k) and the retirement monies will invest in the stock of the new C Corporation giving the Corporation the cash to purchase the inn. The new retirement account invests directly into your new C Corp. by purchasing as much as 95% of its stock, providing the necessary capital to fund the down payment or as much as 95% of the entire purchase. Your new retirement account actually purchases the stock of a company you control, much as if your IRA or 401(k) were to purchase shares in a publicly traded company. Here are the benefits… when you purchase an inn with this type of structure you do not re-pay a loan which adds to overhead and you will not incur penalties and taxes due to a distribution – it is a stock investment.

Profits can flow into your retirement account and can be sheltered proportionate to how much stock it owns in the corporation. Ultimately, once you sell the inn, any gain from the sale of the sale will be tax deferred in the same way as the profit. The accumulated tax deferred profits and the gain from the sale, are now available for re-investment.

Lastly, when the cash requirement exceeds the capacity of just one investor or where multiple investors are required to invest in a single project, one self directed 401(k) plan may be created to accommodate multiple roll-overs.

Note: Custodians don’t offer investment advice-that’s the self-directed part. No outsider can guarantee the soundness of your investment strategy and that can be as terrifying as it is liberating. As always, talking with a good financial advisor who is knowledgeable in your area of interest is important. Unless you have both time and capital to spare, you should be cautious before putting your entire nest egg into a new business. However, investors with a strong do-it-yourself streak and a compelling alternative investment strategy may want to consider joining the growing ranks of people who have decided to invest their retirement funds in themselves.

401k/IRA Information hotline Call 609-759-1050 or complete the following contact information

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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.

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