Broker, Consultant & Expert Witness California Boutique Hospitality
Inn Sellers|California's Many Faces|Inn Buyers|Inn Listings

From Idle Fence-sitting, Good Lord Deliver Us!

From Idle Fence-Sitting, Good Lord Deliver Us! –

Hospitality’s Cautionary Tale

A painful, albeit crucial, life lesson was learned that summer afternoon while sitting atop a split-rail fence at the dude ranch.  Gabbing and giggling alongside other small ranch hands, my fanny suddenly felt sharply stabbed, propelling my jumping off the fence in both pain and terror.  Leaping forward, I glanced back only to see my own younger sister impishly thrilled by the desired consequences inflicted by her poignant, premeditated bull’s-eye pinch.  And, while I have always remembered the excruciating pain, only recently have I realized the valuable life lesson that devilish sibling taunting taught – never for long remain an idle cowpoke fence-sitter!  Life is best served by energetic leaps forward, and far too short for idle fence-sitting.

Years later as an Inn Sales Specialist, I frequently meet aspiring innkeepers who have committed themselves to perennial fence-sitting, considering hospitality opportunities too costly.  Just a few years ago, boutique hospitality, indeed, did become seriously over-priced – not just in California but across our country.  Some who purchased at the height of that tottering market have since paid dearly – foreclosed, bank-owned and auctioned inns now appear all too frequently on our nation’s hospitality horizon.

However, for that aspiring innkeeper whose life’s dream has always been to own and operate a B&B, NOW may finally be the best of all times to buy!  Incredible income and investment opportunities abound with excellent inns now available at fair and realistic list prices.  For active, serious buyers, NOW certainly is NOT the time for fence-sitting!

Unfounded Concern over “Poor Financials”

But then, why do so many fence-sitters, instead of active buyers, flood today’s boutique hospitality market?  The main reason cited is “poor business financials.”   Because of our continuing slow economy and because all hospitality success depends on occupancy – it is occupancy that pays hospitality bills --, it follows that “honest” inns have no choice but to show weak financials, rightfully reflecting our weak economy. 

If it is, indeed, true that occupancy pays hospitality bills, and since occupancy has slowed as a result of our slow economy, then why, you may rightly ask, do lenders still continue to demand the last three years of P&Ls – if our economy has been in the doldrums for the last five years?  If not even the most skilled innkeeper is able to show positive financials, then it is pure folly for buyers and lenders to expect positive P&Ls!  Further, most list prices today have already been discounted, acknowledging poor financials.  In other words, most inns today are offered primarily on their real estate value, with neither business value nor future income potential factored in to list price.

The Appraiser’s SANE Impact

Intrinsically related is the way in which B&Bs have always been appraised.  “Total Value” assigned to hospitality properties by professional appraisers has always been broken down into three components: 1) Real Estate, 2) Personal Property, i.e., furniture, fixtures and equipment (FF&E) and, lastly, 3) Business Enterprise Value (BEV). 

After years of reviewing hospitality appraisals, I have noted an undeniable appraisal trend that assigns the major portion of value to the Real Estate component – the physical building and associated land.  As an example and for simplicity sake, I will use a hypothetical B&B with an assumed overall total appraised value of $100,000.  Since roughly 85% of total appraised value often is assigned to the category of Real Estate, for our hypothetical example, $85,000 will be assigned to the building and land.

That leaves 15% remaining from total appraised value to yet be allocated to the other two categories: Personal Property (FF&E) and Business Enterprise (BEV).  Here again, there appears to be another general appraisal tendency that assigns approximately 10% of value to the furnishings, fixtures and equipment – the inn’s Personal Property or its contents.  In our case, $10,000 will be assigned to cover the value of FF&E.

As a result, only 5% of total appraised value now remains to be assigned to Business Enterprise – a mere $5,000 of our $100,000 hypothetical inn example.  And, this final “value” component includes the “supposedly all-important” business financials!

Not being a trained appraiser, I have tried to understand why so little value traditionally is EVER assigned to Business Enterprise, regardless of strong or weak economic environments.  I have concluded that appraisers wisely feel confidence ONLY in the “concrete, provable and reliable” – land, buildings, furniture and equipment – tangible components that they are able to touch, photograph and/or otherwise readily verify.  

In stark contrast, appraisers do NOT feel as safe valuing managerial styles and/or business financials because these so depend on a particular innkeeper.  Since no two innkeepers ever enjoy the same managerial/hospitality skills, it is understandable that no appraiser feels safe in quantifying this uncertain component – the highly subjective category of Business Enterprise.  Thus, because Business Enterprise derives value so fundamentally from personal management talents of a given -- and replaceable -- innkeeper, this category always is assigned last, and least, appraised value. 

In spite of this, buyers and lenders continue to place unwarranted importance on a B&B’s business financials, ignoring the fact that, even if an inn seller were to be able to demonstrate strong financials today, this alone would not necessarily ensure that his or her successor would manage as capably and, therefore, be as financially successful. 

In other words, buyers should follow the lead of appraisers and evaluate inns purely on real estate and personal property/FF&E values – certainly never on P&Ls.  Again, most motivated inn sellers today have already lowered price expectations to realistically reflect poor financials due to our sluggish economy.

And Now, Will the REAL Fundamentals of Hospitality Success Please Stand Up!

Rather than financials, two other factors far more predict future hospitality success:

1) strong destination location and 2) quality internet marketing.  If an inn is situated within a destination desirable to travelers, that inn stands a strong chance of success.  No man is an island – no inn is an island.  Most travelers first select a destination and then only reserve accommodations in that destination.  Destination always comes first!

Very few inns enjoy the level of market magnetism that allows them to be perceived as independent “destination locations.”  The Gingerbread Mansion in the Victorian Village of Ferndale along California’s North Coast is an exception -- but only by virtue of its long history of tenacious internet marketing and consistent over-the-top guest service.  As an internationally famed industry icon, The Gingerbread attracts seasoned aficionados who simply want to experience being a guest at this renown, architecturally-significant B&B.

In contrast, most other B&Bs benefit from consistent and targeted marketing efforts launched by their communities’ aggressive Chambers of Commerce.  And, even The Gingerbread Mansion now also benefits from Ferndale’s lively Chamber, developed in part to serve The Gingerbread Mansion!  Aspiring innkeepers are wise to consider inns in communities with such active Chambers – and, after becoming innkeepers, -- commit to active membership in their community’s Chamber.  Savvy innkeepers understand that such service ensures simultaneous success of both hospitality and community.

Internet Marketing and Trip Advisor

The importance of investing time, money and persistence to ensure the establishment of a compelling marketing website can neither be underestimated nor overestimated.  Since virtually all reservations today are made online and in advance of guest arrival, an inn’s polished website is vital to success; it serves 24/7 as the inn’s all-important “first welcoming contact” and must invite and sell while also being honest and competitive. 

Developing an “honest” website is essential so that guests, upon arrival, are not disappointed.  Not all guests are suited to all inns.  An honest website will attract only those visitors whose expectations may be fairly met.  Trip Advisor and other similar websites confirm the importance of honest internet marketing; innkeepers have grown to understand how guest comments published on Trip Advisor can “make or break” an inn’s reputation – as always, “word of mouth” counts as the most credible advertising.

Summary Points

  1. Bolster pre-purchase confidence with conviction of “place,” i.e., assurance that your future inn, does command a strong and desirable destination location. 
  2. Understand that future success will depend on an investment in an outstanding, compelling, tenacious and honest international internet marketing presence.
  3. Recognize that hospitality prices presently are at all-time lows ensuring that, in spite of poor business financials, an investment in an inn -- and yourself – may be wise, warranted and timely.  Perennial investment advice mandates “buying low and selling high;” today’s buyers’ market clearly represents such a “low” with good investment opportunities begging for aspiring innkeepers’ serious attention.

A Final Note on California’s Improving Hospitality Industry

Fortunately, California now is just beginning to see an exciting rebound in hospitality occupancy but the Golden State always figures as our country’s first and foremost tourist destination – 30% of all US tourism is controlled by California, including increasing, inbound international tourism.  However, as hospitality regains strength, so too will prices begin to inch up – NOW is NOT the time to idly sit on the fence! 

Johanna Welty, California Boutique Hospitality Specialist / Spring 2011

REALTOREqual Housing Opportunity
CalBRE Lic. # 01307696

© 2018 Properties Online, Inc. ( Content including property details, articles or opinions posed on this website have not been independently verified and cannot be guaranteed. All information offered within this website should be independently verified.  Website content is provided at the reader's own risk and the reader will not hold the parties involved in creating, producing or delivering this information liable for any loss, injury, claim, liability, or damage of any kind resulting in any way from any errors in or omissions from the information. Laws and taxes vary from state to state. You should consult with your individual CPA or tax attorney when purchasing or selling real estate. By providing links to other sites Properties Online, Inc. does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to the agent, brokerage, brand or Properties Online, Inc.

Equal Housing Opportunity.