February 2010
By Rick Newman, Managing Partner of Commercial Capital Network, LLC
Innkeepers wishing to reorganize debt to make capital improvements or refinance a loan that is ballooning or adjusting would be well advised to begin the application process in the early part of 2010.
Rates are low but may not be for much longer... Interest rates seem to have hit bottom, but how long they will stay at this level is anyone's guess. Many experts express concern over the future of our economy and the impact market conditions will have on long-term interest rates.
Thinking of selling anytime soon? If your exit horizon is within the next few years, and you want to do all you can to enhance the value of your inn and make it more attractive to potential buyers, here are a few ideas to consider....
- Refinance now into an assumable mortgage* while rates are low!
- Be in a position to offer a potential buyer a 5.25% to 6.25% assumable mortgage
- Increase your loan to fund improvements that will make your inn more attractive to potential buyers
- Access capital to expand guest rooms/facilities and increase revenue/NOI
Refinance into a loan that is large enough to make it attractive to a potential buyer. The loan should be of an appropriate size relative to its net income before debt service, yet large enough to make it attractive to a buyer. Remember, a buyer's down payment may limit his or her ability to use the assumable provision without a seller-held second mortgage to make up the difference between the sales price/appraised value and their down payment.
Give a lender every reason to say YES in 2010... Make sure your tax filing for 2009 accurately reflects the business and documents that it can comfortably service a level of debt appropriate to the income it generates. Tax Returns are everything! It is understandable that innkeepers reduce taxable income by deducting every justifiable expense they can. This practice may work from a tax perspective, but it can make financing an inn these days extremely difficult when the inn is in the red.
Finally, it is worth noting that the debt service on a commercial loan must be serviced by the income generated from the property; income from other sources such as employment outside the inn can rarely be used by the Loan Analyst to offset losses in the operating income from the inn. The Loan to Value (LTV) is established based on the actual "appraised value" as determined by an appraiser who is approved by the lender. The actual loan amount will be determined by the Loan Analyst/Underwriter, based on the historical record of income and deductions from the tax returns not the P&L's. Generally speaking, the only add-backs to the bottom line on the business tax returns are: Officer's Salaries, Mortgage P&I, Depreciation, Rent, and One Time/Non-Re-occurring Capital Improvements.
Need feedback from a lender? Feel free to call Rick Newman at 570-595-2120
* "Assumable" means it may be assumed, a buyer/borrower must be qualified in his/her own right. A lender is not likely to approve an assumption where their position is weakened in the process.