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Basic Inn Finance

B&B and Inn Financing

In today's summer 2010 market, securing commercial real estate financing continues to be challenging.  Because most B&Bs are zoned “commercial,” buyers need to pursue any and all commercial lending resources to obtain funds needed to purchase the inn of their dreams.  Some inns are zoned residential, having been granted "use permits" to allow legal B&B operations; these properties require "residential" financing.

Traditionally, lenders required a 30% down payment from a buyer and business financials positive enough from the seller to prove that income from B&B operations could service a buyer’s new loan.

Because of our continued and prolonged slow economy – an economy that, understandably, has taken a toll on hospitality occupancy rates across our nation and around the world --, innkeepers today are having a difficult time maintaining the type of positive financial statements that lenders need for approval of new owner financing.

Too, and as a further consequence of our uncertain markets, many aspiring innkeepers/buyers no longer are able to easily sell a residence or “cash in” on investments that they once had in retirement portfolios.  Thus, a 30% down payment expected in the past of buyers no longer remains a “given” in today’s world.  Nevertheless, the bare minimum liquid assets any buyer will need today still remains roughly 30% of the purchase price, i.e., 20% down and 10% for closing and reserves.

In our current economy, we all find ourselves in new, uncharted territory – a place where whatever "used to be"simply "is" no more.  That this challenging environment does not solely impact US sellers and buyers is further underscored by the fact that Europeans who had intended to buy this summer in California have now altered plans, thanks to fluctuating exchange rates involving the EURO.

Today’s aspiring innkeepers cannot rely solely on the traditional banking system for financing and often turn to the Small Business Administration (SBA) for necessary assistance.  Any aspiring innkeeper truly serious about owning and operating an inn should become familiar with the different resources and programs offered by the SBA.

Buyers also rely on others who wish to invest as a group in a hospitality venture.  Many of today’s finest inns are owned by such “investment groups” who appoint one of their own or an experienced hospitality professional as “General Manager” to grow such a group hospitality investment.  With this scenario, quality of destination, location within a prime destination and size of proposed facility become vital to winning key investor confidence and adequate financial support.

For smaller establishments, the sale of a residence continues to provide inn acquisition funds.  However, in today’s uncertain residential market, if the buyer’s residence is not already sold, his/her offer on an inn often must become “contingent” on the sale of his/her home.  If the home does not sell, then the offer on the inn usually becomes cancelled.

Aspiring innkeepers should learn if an inn seller’s current loan is “assumable.”  Assumable financing may provide an easier pathway to necessary funds.  Another option is seller financing where the seller “carries back” some of the paper for a period of time.  If seller financing becomes part of the mix, both seller and buyer need to become fully protected with proper use of additional legal financing documents/contracts.

Fundamental to all financing is ensuring that income from operations is adequate to service all loans, operating expenses and property taxes.  Obviously, with a greater down payment, less needs to be financed and/or serviced.  Ideally, aspiring innkeepers should strive initially to put as much of their own money as possible into the purchase in order to keep down monthly servicing costs.  Particularly in the early years of owning an inn – the period when new innkeepers learn the business and experiment with ways to increase revenue--, keeping monthly mortgage payments to their minimum makes sense.

There is no question that purchasing a B&B today can be a wise decision for those who have long dreamed of becoming innkeepers.  Because the market is at its low, inn prices also are at their low.  Savvy investors always try to buy low and sell high.  If a buyer were to have the financial resources, NOW – TODAY – THIS MINUTE – these would be perfect times to take quick, decisive action and advantage of the many excellent, well-priced hospitality opportunities offered by today’s highly motivated sellers.

Timing this summer could not be better; 2010 government tourism projections for California are beginning to point toward an exciting rebound.  The opportunity to buy “low” will no longer remain an option once such projections become fully documented, published statistics.  If a buyer were to act now, his/her new B&B could become one of the first to benefit from California’s early tourism upswing; this same new owner also could become one of the first to see reflected in his/her own B&B financials the positive results of such predicted increased occupancy.  It is an industry fact that “occupancy” produces the strongest and most basic form of bottom-line revenue for all hospitality establishments.

If owning and operating an inn remains your dream, take advantage of today’s well-priced inn opportunities and motivated inn sellers.  This is the time to act … and make financing happen!    

 

 EXTRA NUTS and BOLTS LINKS

BedAndBreakfastFinancing.com

Inn Financing for Innkeepers/Owners
Inn Re-Financing a Bed and Breakfast
Using Inn Financing 401k IRA Assets for Capital Improvements

Inn Financing for Aspiring Innkeepers
Aspiring Innkeepers 2010 Financing Update
Using 401k IRA to Purchase a B & B
Purchase a Bed Breakfast Using IRA 401k Assets

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