Real Estate Terms and Definitions
Let us help you understand some of the terms you might see when buying or selling a property.
Real Estate Terms
F is for Feasible Inn for Sale
Feasible? What’s “feasible?” On our Inns For Sale page, The B&B Team® defines different types of inns as being either “lifestyle,” “financially viable,” or “feasible.” Unlike lifestyle or financially viable inns, by “feasible,” we mean “properties with a size and location that have the realistic potential to become financially viable. They may include unique hospitality properties that are distressed, closed, underperforming, or currently used for other purposes.” What kinds of bed & breakfasts are we talking about?
In this era where many inns have gone out of business, closed by choice, or been foreclosed upon, there are potentially a number of feasible properties for sale in this category.
Take the example of a bed & breakfast that was purchased at the peak of the market in 2006. The buyer may have paid top dollar and bought it, figuring he would make money reselling it no matter how the business did “because real estate always goes up” (did you ever hear that before?). That buyer may even have invested in fixing the property up, assuming that money spent translated to increased value. When the Recession hit and business went down, he could no longer afford the mortgage, and the bank now owns a property that is closed, has no business track record to speak of, but is ready to go. This is the “perfect” feasible inn to buy if it has the size, location, and condition that lend themselves to a successful business, but there’s no cash flow to help acquire it. So, it takes some financial wherewithal to make it happen, but banks are often willing to offer favorable terms to a strong buyer.
Another example could be the ten guest room B&B that was started in the early 1990’s. It was run well for a few years, but became tired. Business declined, and the owners thought they were too old to learn all the new tricks (social media, blogging, online reservations, etc.). The bed and breakfast may have had a good reputation, and may still enjoy some good will, but it needs updating in decor, amenities, and marketing to make it financially viable. It doesn’t have revenues that live up to its inherent potential. Priced right, this could be another example of a feasible inn. Fix it up, ramp up the marketing, and you’ve really got something.
Then there’s another possibly feasible inn. There are two structures, one with 9 guest rooms, the other with four and a restaurant that has been open and closed three times in the past three years, and the rooms are a disaster. The property has a good location but has been abused and neglected for a long time. No one would seriously consider it for a residence, so it really should be an inn again. But it needs a LOT of work. In theory it might be feasible. A professional feasibility study of the property indicates that the size, location, and potential business mix have every reasonable potential to make money. The price tag from the bank (it’s another one of those bank-owned properties!) seems reasonable. But the fix-up costs seem daunting.
In this case, the study reveals that successfully renovated, updated, and operated the inn could, in fact, be a money-maker, but whether it would make financial sense and could become viable depends upon the fix-up cost. If the work could be accomplished for $500,000, the feasibility study indicates that the buyer could eventually (in 5-7 years) realize a solid return on their investment. But if the fix-up costs were to reach $1,000,000, one would be ill-advised to take on the project. So, “feasible” becomes a potentially risky and expensive proposition, depending on the total initial investment.
Is there a risk-reward equation to consider? Certainly, there is, as with any investment. And a smart buyer will want to have a feasibility study performed to assess the inherent risks and potential rewards before acquiring a distressed, closed, underperforming inn, or currently used for other purposes. “Feasible Inns For Sale” can afford excellent opportunities. To know the risks and evaluate the opportunities, hire professionals who can guide you to an educated decision. You’ll be rewarded for taking the time and investing in seasoned advice.
At The B&B Team®, we love this kind of work. We enjoy sharing creative ideas with you to look at the exciting possibilities. But we also bring you down to earth about the realities. If it makes sense, we’ll support you all the way. And if it’s seems like a bad choice with unacceptable risks, we’ll let you know that, too. The job of the inn consultant is complex, but the role of the inn consultant is simple: We guide. You decide.
V is for Values in Business
Wikipedia defines “values” this way: “A personal and/or cultural value is an absolute or relative ethical value, the assumption of which can be the basis for ethical action. A value system is a set of consistent values and measures. A principle value is a foundation upon which other values and measures of integrity are based.” Do values matter in business? I think so.
We all like to think that we are being treated “the right way.” One can argue that “the right way” may vary from person to person, as what is “right” for one person may not be so for another. But there are some fundamental practices that embody values and “the right way” to treat others in the business. In the simplest and broadest sense, being honest is core to the concept of values. Honesty is not subjective; either someone is telling the truth or they are not. They might make a mistake, but that’s not the same as being untruthful. So, honesty matters.
In the business of inn brokerage, whether representing someone buying a bed and breakfast or selling a bed & breakfast, being ethical is core to reflecting values in business. Many professions have formal codes of ethics. The one which we at The B&B Team® refer to most is the Realtor Code of Ethics. The Code can best be described as codifying the Golden Rule.
As an ethics instructor, I teach the importance of adhering to the Code, not just because it’s the right thing, but because it’s good business. The concept of “representing” a client means putting the client’s interests ahead of one’s own. Too often we see practitioners who place their own interest in “getting a deal done” and getting paid ahead of whether it’s the right decision for the client. Frequently those people who are disillusioned with how they have been treated by others come to us to complain and, hopefully, help them put things right. We cannot undo the past, but we can certainly treat them right going forward.
Being ethical also means obeying the law, which seems like a “duh!” kind of statement. But consider this: anti-trust law is intended to prevent collusion in setting rates of payment or commission structures. In our business we often share fees that we earn with cooperating inn brokers and inn consultants. It works like this: an innkeeper hires us to sell her inn. We have a fee arrangement with the sellers that establishes what we will be paid under different scenarios. Many times another broker with a buyer will ask us what we are being paid and if the “split” is 50/50. Our response is always to tell them what we are offering as cooperating compensation, nothing else. It would be a violation of the law to tell others what our fee structure is, as that could be construed as collusion or “setting rates.” Besides, it’s a confidential, contractual agreement between us and our clients. Likewise, when we ask what compensation would be offered to us if we bring a buyer to the table we are often told what a listing broker’s commission is and what the split is. I cringe every time, as that is NOT what we asked for!
Another key component of values and ethical behavior is maintaining confidentiality. If you tell us something that is personal (you are ill or in a divorce, for example) or confidential (which can include negotiating strategies, bottom or top line price, etc.), that information helps us understand your situation, but we will NEVER disclose that to anyone else EVER unless you authorize us to do so or we are required by law. Does this seem complicated? Not to us. Not when it’s natural to do the right thing. Not if we keep the Golden Rule in mind.
Our goal at The B&B Team® is simple. Our mission statement says it all: “We help our clients reach their personal and financial goals in the Innkeeping industry.” To be certain, we have our own financial goals (after all, we are in business), but they are not to be obtained at the expense of a client’s. Ever. Period. We believe that if we do the right thing by you, you will reward us with repeat and referral business. Our reputation is more valuable than any fee we earn.
People considering hiring us always ask us good questions about how we work. And the response is rather lengthy and, frankly, something only to be shared with a prospective client, not the world. If you’d like to understand better what we do, how we do it, and really understand what our VALUES are, I invite you to contact any of us. I started this company in 1993 on a foundation of ethical behavior, and every person who represents The B&B Team® brand is someone you can have absolute confidence in. That is our promise to you.
Calculating Occupancy for a Bed & Breakfast
Occupancy rates are used throughout the bed and breakfast industry to indicate how often rooms are occupied. How occupancy is calculated is a mystery to many current and aspiring innkeepers, but it’s very simple if you know the rules. The first rule is that a year always has 365 days except for certain circumstances, which I’ll explain later.
To calculate occupancy, you need two essential pieces of information: (1) how many guest rooms does the bed and breakfast have, and (2) how many room nights did the inn sell? A room night is any one room occupied for one night. If a guest stays for three nights, there were three room nights sold.
The first calculation is to determine how many room nights were available in the course of a year. If a B&B has 5 rooms, it has 5 x 365 = 1,825 available room nights. Let’s say the B&B sold 976 room nights last year. To calculate the occupancy you need to know what percentage of the available nights were sold. You do that by dividing the rooms nights sold by the room nights available and multiplying by 100 (to get the percentage). 976 ÷ 1,825 = .53 x 100 = 53% occupancy. If an inn has 10 rooms, it had 3,650 available rooms nights. If they sold 1,675 rooms, they had a 46% occupancy (10 x 365 = 3,650 available rooms nights; 1,675 ÷ 3,650 = .46 x 100 = 46%).
There is a tendency to want to make occupancy look better than it is by reducing the number of available rooms nights because of vacations or being “closed.” Most of the time, these are discretionary choices made by an innkeeper, may often be in slower periods of the year, and are not governed by any rules. The problem with this is that as soon as an innkeeper does this, one has no way of knowing how to compare their occupancy to someone else’s.
There are only a couple of acceptable exceptions to the 365 day rule. One is where a property is in a seasonal location where virtually all properties close for an extended period (open season is May to October, for example). In this case, the occupancy may be calculated using the days of the season but should indicate that it is a seasonal rate. The other exception would be if a block of rooms are unusable for a period of months due to a fire or major renovation. It is not acceptable to say that because two rooms were repainted and that while they were being painted they were “not in service.” Unless an innkeeper was painting in the midst of their busiest season, it is unlikely that 100% of the rooms would have been sold anyway. The rooms still count in the “available” calculation.
If an innkeeper is putting data on an inn for-sale directory, could you make sure your calculations are correct? And when reading statistics about an inn for sale, aspiring innkeepers should take much of what they read with a grain of salt until the method of calculating occupancy can be verified. If you have questions about this, we at The B&B Team® would be pleased to answer them for you.
Real Estate Terms: GoodWill
by Peter Scherman of The B&B Team
What exactly is “goodwill?” Goodwill is what is known as intangible personal property that is part of a business. With an inn, as we discuss in the article “The Components of Inn Value,” the base value is real estate. On top of that, you have FF&E (furniture, fixtures, equipment, or tangible personal property). Tangible property can usually be valued fairly objectively. However, business property is often transferred at a price exceeding the physical parts’ sum. The difference is goodwill.
Goodwill is the price a person is willing to pay for a business’s marketplace presence (that would otherwise take time to establish), a guest or customer base and list, a good reputation, a track record, good staff and management, and because of these things, the ability to generate a reliable stream of income.
You can’t see goodwill, but you can measure it by the price a person pays for it. And the IRS treats it as depreciable property, so you know it’s real!
Real Estate Terms: Letter of Intent
Frequently in searching for an inn to buy, you find something that looks like it just might be the one. Unfortunately, you don’t really know because there is a lot yet to be learned before making a firm commitment. If, however, you know enough (especially the financials) to be able to formulate a basic offer, a good way to start the process is sometimes with a letter of intent.
This simple document is nothing more and nothing less than what it is called. It can be quite formal and detailed or remarkably simple. Essentially a letter of intent is directed from the prospective purchaser to the seller stating the buyer’s intention to buy the inn. The very basic terms of the offer delineated in the letter should include the price, proposed closing date, and basic financing conditions. It should also include provisions for the itemized inventory, financial review and verification, home sale contingency (if applicable), inspections of the facilities, formal contract preparation, and any other terms which may be required or requested by the buyer. All of these contingencies should be met or waived within a specified study period.
When presented to the seller, the letter of intent can be negotiated. Since only the main points of the offer are covered, it’s relatively simple to reach agreement or learn that no agreement can be reached, at which point the parties can go their separate ways with little out-of-pocket expense. However, if the parties do agree, then the framework for a binding contract has been established, and each party has set pen to paper to express and accept that intent.
In most jurisdictions, a letter of intent is not binding, so a contract should be prepared as quickly as possible. The attorneys, however, have a framework with which to draft the main points.
Real Estate Terms: Turnkey
Do you know what they mean by “turnkey”, “mostly turnkey”, or “real estate only”?
The terms are frequently seen in advertising of bed & breakfast inns for sale: “turnkey,” “mostly turnkey,” “real estate only,” “real estate and good will.” They provide clues to what is included in the purchase price. Prospective purchasers of an inn need to know exactly what they mean.
Essentially, “turnkey” means that everything that is in place in a bed & breakfast or inn is included in the purchase price. The image conjured is that of a seller leaving the premises, locking up, and handing the key to the new owner, who needs only “turn the key” to be in business. “Partially” or “mostly” turnkey is a more realistic description of an inn sale, as most innkeepers have some personal items distributed around the inn which they plan to keep. While those personal items will be removed, most everything needed to run the inn will remain and is included in the purchase price.
In most cases where a bed & breakfast is being sold, many or most of the furnishings are included. If not, the purchaser is buying “real estate only” or “real estate and good will.” For “real estate only,” only the real property is included in the sale price. In some cases, the personal property may be negotiated separately from the real estate. In rare cases, where a seller is planning to remove all personal property from an inn which has otherwise enjoyed a strong business and loyal following, there may be a premium for the good will, that intangible asset which has value in the market place.
Whichever term has been applied to the sale of an inn, all parties are served by a detailed inventory of all personal property included in the transaction, which is ideally itemized room by room for ease, and should identify those items which are specifically excluded from the sale and which items are not included but are negotiable.
