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Financing for Innkeepers and Aspiring Innkeepers
Financing for Innkeepers and Aspiring Innkeepers

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Congratulations to Birgit and Slobo Rabin on the purchase of the Goldmore Inn.

9001 N. Sand Hill Road
Galena, IL 61036
Phone: (815) 777-3925
www.Goldmore.com
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Congratulations Chris and Myra . . .  may you find happiness and success as the new innkeepers of the Inn Around the Corner.

Inn Around the Corner
Black Mountain, NC 28711
Phone: 828-669-6005
www.InnAroundTheCorner.com
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Congratulations Chris and Myra . . .  may you find happiness and success as the new innkeepers of the Inn Around the Corner.

Inn Around the Corner
Black Mountain, NC 28711
Phone: 828-669-6005
www.InnAroundTheCorner.com
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Congratulations to Chris and Lois Mahoney on the purchase of The Blair House Inn B&B.

Blair House Inn Bed and Breakfast
100 W Spoke Hill Drive
Wimberley, Texas (TX) 78676
Phone: (512) 847-1111
www.blairhouseinn.com
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Congratulations to Bud and Kim Wagner on the purchase of The Fox and the Grapes Bed & Breakfast.

The Fox and the Grapes Bed & Breakfast
9496 NY-414
Lodi, NY 14860
Phone: (607) 582-7528
www.TheFoxandtheGrapes.com

Can I really use my 401k/IRA to purchase an inn?

Few investors/entrepreneurs realize that they have the ability to finance the purchase of a business with retirement assets.   Most people, including many attorneys and accountants are under the impression that there are only two ways to access IRA/401k capital from their plan/s.  Borrowing involves repaying the principal with interest while borrowing may be subject to a pre-distribution tax and penalties and generally must be repaid within five years.  Note:  Early withdrawal may not be permitted by the employer who sponsored the plan, so check with your employer first.

Background:  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—IRA 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.

Here is how it works…  A new corporation will be formed and will sponsor a new IRA.  You decide how much of your retirement assets/funds are rolled into this new account and the retirement plan will invest in/purchase stock in the corporation providing the capital to fund the down payment or outright purchase the inn.  The new retirement account can own up to 95% of its stock.  Your new retirement plan actually purchases the stock of a company you control, much as if your individual IRA were to purchase shares in a publicly traded company.

Why borrow from a retirement account?   When you purchase an inn with this type of structure you do not re-pay a loan which adds to overhead.  Why terminate or cash in and account when you can roll it over and not incur penalties and taxes due to a distribution?   Profits can flow into your retirement account and can be sheltered proportionate to how much stock it owns in the corporation.  Ultimately, once you sell the inn, any gain from the sale of the sale will be tax deferred in the same way as the profit.  The accumulated tax deferred profits and gain from the sale at some point, have grown in a tax deferred structure and are now available for further investment and re-investment .

Very Important!  When the cash requirement of an acquisition exceeds the buyers available capital and consequently multiple investors are required to invest in a single project, one self directed 401(k) plan may be sponsored to accommodate multiple roll-overs; this feature may be very useful/attractive to family members or outside investors who wish to provide financial assistance or take advantage of an investment opportunity.

No outsider can guarantee the soundness of your investment strategy and that can be as terrifying as it is liberating.  Consulting a trusted financial advisor is important.  Unless you have both time and capital to spare, you should be cautious before putting your entire nest egg into a new business.  However, investors with a strong do-it-yourself streak and a compelling alternative investment strategy may want to consider joining the growing ranks of people who have decided to invest their retirement funds in themselves.  Note:  The material contained in this overview is provided for your general information and should not be acted upon without prior professional consultation with the appropriate experts.

All Rights Reserved © 2004 – 2013 Richard K. Newman

 

Inn Valuations and Appraisals
By Rick Newman, Managing Partner of Commercial Capital Network, LLC
 
All Bed & Breakfasts/Inns are unique by design; in fact, it is that special and unique quality that distinguishes one Bed & Breakfast/Inn from the next.  Innkeepers invest their creative energy and capital over time to create a welcoming and hospitable environment that is unique to their community and valued guests. While the charm and ambiance of an inn add to a patron’s experience, such intangibles have only an indirect effect on the actual value.  So, how can an innkeeper determine a realistic, fact based asking price before marketing their inn for sale?
 
A knowledgeable “B&B Industry Specialist Realtor” should be engaged very early on to consult on matters of value and how best to prepare the property itself and prepare financial data prior to offering the inn for sale.  A good number of these Realtors have been innkeepers themselves, and are intimately familiar with their market area.  They can expertly support the initial asking price with their own analysis of the inn’s Financial Performance, Real Estate Improvements, Good Will, and Furniture, Fixtures & Equipment (FF&E).  I cannot overstate how important it is for an innkeeper to accurately determine the market value of the business prior to making the inn available in the marketplace.  In my view, arbitrarily assigning a value to a business and its assets based on what someone feels it is worth is imprecise and cannot be a successful approach, knowing that an appraiser will eventually establish a value of the business and its assets.  The innkeeper or their representatives must be able to defend the asking price with tax returns to document the business’s performance/viability over time and other documents to value its business assets.
 
Where the rubber meets the road:  Ultimately, if a commercial loan is required a “Bank/Lender Approved Appraiser” will be selected to establish the value of the business and its assets.  In most cases, the “Commercial Value” of a hospitality property will be largely determined by examining comparable sales and financial data for actual closed sales of “Comparable Hospitality Properties” in the past two years.  The bank’s appraiser will make adjustments to account for location, physical amenities, cash flow and so on; but the final and most important determinate of value is the inn’s historical ability to generate income; this value will be referred to as its value as a “Going Concern” or its commercial value. 

What happens if the appraised value is determined to be less than the contract sale price?  Answer:  The appraised value will be used to determine the actual loan-to-value rather than the contract price.  When a property’s value as determined by the bank’s approved appraiser to be less than the contract price, the parties to the contract may decide to re-negotiate the sales price.  One can imagine the anxiety the parties and their representative’s feel when this happens.  The chances of this occurring are significantly reduced with good preparation prior to offering the inn/B&B for sale.  

About the author:   Rick Newman is the founder of Commercial Capital Network, (CCN) His website and articles provides useful information to Innkeepers who seek to re-finance/re-structure their existing debt, and Aspiring Innkeepers purchase “The Inn of their dreams”.  The company maintains relationships with leading hospitality affiliate organizations and professionals. Rick is well known in the industry for consulting with Innkeepers, Aspiring Innkeepers and their professionals, to facilitate the orderly exchange of information, financing and conveyance of business property.

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