Clients texted me a few weeks ago and during our exchange of texts they acknowledged (and fully appreciated) my role not only as broker/advisor, but as a counselor, coach, cheerleader, human resources director, business consultant, financial services advisor, restaurant and wine advisor (okay, not really imperative) but you get the point! And I’ll add ‘puzzle master’ as there are many pieces of a commercial deal that have to fit together.
Most importantly, these roles help me relate to my clients on a personal level. I’ve been through every step, as an aspiring innkeeper looking for inns through financing to operations, to broker having sold the inn, so I can relate on the emotional level. So much of my role is guiding clients through the many steps of this business and real estate acquisition.
Helping clients remain calm and focused while navigating the maze from start to finish makes a big impact on their experience.
We just received notification that the appraisal came fine! And in commercial deals, waiting on a commercial appraisal can be extremely stressful. But that’s another blog post topic entirely. Here was our text exchange after receiving the lender’s email (although the deal had been going pretty well, we agreed not to fist pump until satisfactory appraisal!):
To give you a sense of what’s involved in a typical lodging transaction (not necessarily in this exact order):
- buyer looks at property (or several)
- with further interest, buyer requests financial information (sometimes prior to the showing)
- buyer and broker perform cash flow analysis to come up with what debt it could support
- often buyer then sends the cash flow analysis and their personal financial details to several lenders to obtain proposed terms
- buyer makes offer based on their available cash (commercial loans require 20-30% down as a rule of thumb) and cash flow analysis (business value)
- buyer engages a real estate attorney
- buyer works on/finalizes business plan with projections several years out on how they’re going to operate and increase the business value (so they make money when they sell)
- buyer submits loan application with business plan and personal financial information to their lender of choice (who offered the best terms)
- within a week or hopefully no more than two, lender gives a “commitment letter subject to appraisal” and buyer sends a check for the appraisal (which is often in the $3k range for a commercial appraisal) The commercial appraisal process can take 4-8 weeks. There have been times where an appraisal may not come in until a week or two prior to scheduled closing
- buyer seeks a professional building inspector to perform the complete building inspection. If the inn is open for business, this has to be coordinated around guests. Buyer comes in for inspection (often from out of town)
- buyer continues with due diligence, inspecting business records, town records, code enforcement, etc.
- buyer may have a house to sell – house has to be put on the market and sold by a certain date per the Purchase and Sale Agreement. But what if the terms on the buyer’s purchase end don’t coincide with the terms on the buyer’s house sale end? The buyer needs to know that they won’t be forced to sell if their purchase end falls through, etc. These things have to be coordinated to protect the parties every step of the way
- If buyer has a job they for which they need to give ample notice, coordinating the timing of that notice at a point where it’s safe on the buyer’s purchase end, where they’re fairly certain the deal will go through. What if it falls through and they’ve given notice? Another step where timing is essential to protect the parties’ interests
- buyer has to apply for the required state and/or municipal lodging or operating licenses, often requiring 30 days or so to receive the license
- buyer has to form a business entity (a corporation or LLC) prior to closing
- buyer must have a property and liability insurance binder in place just prior to closing
- buyer should engage with an accountant experienced in the hospitality field – at some point during the process, the parties will have to negotiate an “allocation of assets” which becomes the buyer’s basis for depreciation schedules and future tax returns and an accountant is best to advise the parties. The allocation of assets means if a property sells for $xx – the full amount is broken down into building, land, furniture, fixtures and equipment (FF&E), intangibles (goodwill, trade name, website, etc) and possibly a non-competition agreement. Each of these has value and affect the parties differently
- buyer typically gets some amount of training pre and post closing which has to be coordinated (website, reservation system, vendors, employees, inventory – all of this has to be considered)
- seller has to move out to be able to hand over the premises the day of closing. Buyer has to coordinate moving in. What if the inn is open for business at the time of settlement? That takes careful coordination and goodwill between the parties if the buyer has guests arriving the day of closing. And what if there are guests just up until the day of closing? The seller needs to take care of the guests and move their belongings out! It can be worked out, it just takes coordination and cooperation
I feel obligated to mention that my clients excluded “computer maven” from my roles as I must have some electromagnetic field that interferes with electronic devices. [See MacBook Pro screens below. I eventually replaced the computer]
I may not know the hardware side, but the applications, programs, spreadsheets, desktop publishing, marketing and social media? Yeah, I GOT THAT COVERED!