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:
- A down payment of 20%
- Cash reserves necessary to offset losses while increasing the cash flow from point A to point B in the business plan
- A resume that contains direct hospitality experience or transferable qualifications
- A seller who realizes that an under-performing business is worth less than a profitable one and has priced it accordingly.
- 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
Few business owners realize that they have the ability to use retirement assets to pay for improvements to their property. Most people believe that there are only two options available to them if they want or need to access capital from their 401(k) or IRA. Borrowing from a retirement account, while still employed with the employer who established your 401(k), may solve a short term objective but it will require a return of the principal with interest. Early withdrawals on the other hand, are subject to pre-distribution taxes and penalties. 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 — retirement 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.
