I have had some great conversations since my last post on using Gross Rent/Income Multipliers in inn sales. Thank you all.
One important issue that several people brought up was the Rent/Income component - what actually is INCOME when using the GRM method of establishing value?
To make things clean and simple, the income/rent we refer to when using the gross multiplier is room income. This is room income that does NOT include sales tax. Historically, it has never been consistent whether sellers are using sales tax in their income figure or not. This is the first thing a professional, experienced inn broker asks. Sales Tax is not your money, you are simply collecting it for the State of Maine and passing it on. It should never, ever be included in income when establishing value. Including sales tax can throw off the figure so much, in some cases, it can destroy a transaction.
Let's say that we are dealing with a popular inn where the gross rent income from rooms is $700,000. The sales tax charged on those rooms would have been $49,000. If included when the value analysis is done, assuming a 5 GRM, the indicated value is thrown off by almost $150,000. A buyer who has assumed that the seller and the broker have represented the income honestly is performing their due diligence based on an inaccurate number. When this discrepency is discovered not only will the buyers time have been wasted but the honesty and professionalism of the broker and seller will be questioned also.
The use of a GRM becomes more complicated when food service is included (other than breakfast which is expected) or other income sources such as gift shop in the inn. I recently reviewed an inn's profit and loss statement that showed six different income sources. I had to boil it down to the actual room rent and figure out the value of the other income streams on another basis.
Bottom line, there are many, many facets to establishing value of an income producing property. A Inn is even more challenging because of the hybrid nature where a business and a home exist in the same space.
The use of a GRM is a down and dirty way to look at value but it is not the final say. I use a GRM all the time when I look at properties to consider if they are in the ballpark - assuming that there are features of the property that I don't yet know which can affect the indicated value. If the asking price of the inn appears to be reflective of the GRM then I share it with clients, if it is way off I have to first investigate - Why? Are there other features to the property that would not show up in a GRM value calculation or is the property just overpriced?
One of the most important considerations in using a GRM is to establish that the seller and the broker have disclosed the income properly - ask the question. Most importantly, ascertain early that sales tax is not included in the stated gross income.
Thursday, January 26, 2012
Tuesday, January 24, 2012
Monday, January 16, 2012
What is this GRM thing?
I love working with new clients. They have usually been bombarded with information and their heads are swimming. It is my job to help wade through the hyperbole and help clients get a clear picture of what everyone is talking about.
So, to start somewhere, what is all this talk about GRM, GIM, ROI, NOI, LTV and on and on? Let's focus on one of the most confusing, but really simplest concepts... well.... simple until it gets complicated.
GRM or GIM refers to the Gross Rent Multiplier or Gross Income Multiplier. The GRM/GIM is simply a number - a factor if you will - identified through analysis of sold properties, used to indicate the value of a property in a simple manner, quite frankly, an OVERsimplified manner.
One simply identifies the proper GRM by talking with industry experts - bankers, appraisers, brokers - and multiplies the gross income of the subject property by the GRM to arrive at an indicated value. Easy enough, right? So, assuming that you have been told that 5.1 is the current GRM used in the B&B business and you are looking at a property that shows an income of $100,000 then, 5.1 X $100,000 = $510,000. Simple. Done Deal.
But wait.... not so fast. There are myriad factors that need to be considered that are not reflected in a GRM. When clients tell me that they have been told that the B&B industry GRM is "x" across the board, I tell them that they are talking with someone who doesn't understand the broad expanse of the Inn business.
Identifying a GRM/GIM is important but not the final say on value. Those of us who are the "industry experts" know that a baseline GRM is great indicator of base value but then we have to look at each property individually and consider how this property has to be adjusted to reflect items not acknowledged in the baseline GRM. There are LOTS of unique issues.
For instance, owner's quarters are one of the primary "adjustments" made to the GRM indicated value. Whether superior or inferior to the properties reflecting the current GRM, adjustments need to be made to the indicated value. Assuming a GRM of 5 is the average, a property with no owner's quarters will likely require a reduction on the value indicated by use of the GRM. At the same time, a property with expansive, superior owner's quarters will require an adjustment to increase the value that is indicated by the GRM.
A frequent argument we hear is the fact that a property is on the ocean should increase the GRM. That is not necessarily true. Yes, if the inn has a gorgeous oceanfront residence that the owner can enjoy, an adjustment is in line. However, an oceanfront location will already be reflected in the indicated value arrived at using the GRM because we use the INCOME of the property and INCOME of the property has already been positively affected by the oceanfront location. A six room in sitting on a private, oceanfront point will likely have higher room rates and occupancy than a six room inn on a side street with no parking - so the value of that location has already been reflected in the income when you multiply the income by the GRM.
I am REALLY simplifying the whole GRM concept just to get you familiar with the idea. There are SO many other factors. I am going to leave the discussion of the income used to multiply by the GRM for the next post. That is a whole other complicated issue.
Gross rent multiples, while seemingly a simple method of establishing value, have lots of drawbacks which is the reason they are used along with other indicators of value, not on their own. In order to keep up to date with the market you will want to find out how the GRM that you are given was arrived at. In the next post we'll look at a particular property and how we arrive at the GRM for that inn and how that GRM should be used to indicate value in others.
So, to start somewhere, what is all this talk about GRM, GIM, ROI, NOI, LTV and on and on? Let's focus on one of the most confusing, but really simplest concepts... well.... simple until it gets complicated.
GRM or GIM refers to the Gross Rent Multiplier or Gross Income Multiplier. The GRM/GIM is simply a number - a factor if you will - identified through analysis of sold properties, used to indicate the value of a property in a simple manner, quite frankly, an OVERsimplified manner.
One simply identifies the proper GRM by talking with industry experts - bankers, appraisers, brokers - and multiplies the gross income of the subject property by the GRM to arrive at an indicated value. Easy enough, right? So, assuming that you have been told that 5.1 is the current GRM used in the B&B business and you are looking at a property that shows an income of $100,000 then, 5.1 X $100,000 = $510,000. Simple. Done Deal.
But wait.... not so fast. There are myriad factors that need to be considered that are not reflected in a GRM. When clients tell me that they have been told that the B&B industry GRM is "x" across the board, I tell them that they are talking with someone who doesn't understand the broad expanse of the Inn business.
Identifying a GRM/GIM is important but not the final say on value. Those of us who are the "industry experts" know that a baseline GRM is great indicator of base value but then we have to look at each property individually and consider how this property has to be adjusted to reflect items not acknowledged in the baseline GRM. There are LOTS of unique issues.
For instance, owner's quarters are one of the primary "adjustments" made to the GRM indicated value. Whether superior or inferior to the properties reflecting the current GRM, adjustments need to be made to the indicated value. Assuming a GRM of 5 is the average, a property with no owner's quarters will likely require a reduction on the value indicated by use of the GRM. At the same time, a property with expansive, superior owner's quarters will require an adjustment to increase the value that is indicated by the GRM.
A frequent argument we hear is the fact that a property is on the ocean should increase the GRM. That is not necessarily true. Yes, if the inn has a gorgeous oceanfront residence that the owner can enjoy, an adjustment is in line. However, an oceanfront location will already be reflected in the indicated value arrived at using the GRM because we use the INCOME of the property and INCOME of the property has already been positively affected by the oceanfront location. A six room in sitting on a private, oceanfront point will likely have higher room rates and occupancy than a six room inn on a side street with no parking - so the value of that location has already been reflected in the income when you multiply the income by the GRM.
I am REALLY simplifying the whole GRM concept just to get you familiar with the idea. There are SO many other factors. I am going to leave the discussion of the income used to multiply by the GRM for the next post. That is a whole other complicated issue.
Gross rent multiples, while seemingly a simple method of establishing value, have lots of drawbacks which is the reason they are used along with other indicators of value, not on their own. In order to keep up to date with the market you will want to find out how the GRM that you are given was arrived at. In the next post we'll look at a particular property and how we arrive at the GRM for that inn and how that GRM should be used to indicate value in others.
Sunday, January 8, 2012
What is "turn key" ?
Turn-key is a term frequently used when selling businesses. People have many different definitions of turn-key. My definitition, when it comes to Inns and B&Bs, of turn-key is being able to purchase an Inn, walk in and welcome guests that very same night. That definition makes very few Inns truly turn-key but makes most practically turn-key.
Most inn sales include all of the furniture and appointments in the guest rooms. Art work is often the exception. It is not unreasonable for the pieces that are leaving with the seller to be substituted. In most cases, the buyers will have pieces that they want to include in the guestrooms anyway.
The public space of the inn often has pieces of furniture and art that are special pieces to the owners, it is what helps personalize the inn and reflect the style of the owners.
Rarely does anyone expect the owner's space to have any furniture remaining.
I recommend to my seller clients that they remove any personal things from the public part of the property that will not convey, if possible. If there is anything major not staying with the property that is present at a showing, this should be disclosed at the very beginning.
We have sold many, many inns over the years - since starting this specialty division in 1986 - and I have seen the personal property list become a problem many times. We need to bring this issue to the table much sooner than we do both as sellers and brokers.
I have been on both sides of transactions both as a broker and as a buyer/seller. Both sides need to be reasonable but the greatest advice I can give is for sellers to remove things that will not be staying with the sale or identify them at first showing if they are non-negotiable items.
Most inn sales include all of the furniture and appointments in the guest rooms. Art work is often the exception. It is not unreasonable for the pieces that are leaving with the seller to be substituted. In most cases, the buyers will have pieces that they want to include in the guestrooms anyway.
The public space of the inn often has pieces of furniture and art that are special pieces to the owners, it is what helps personalize the inn and reflect the style of the owners.
Rarely does anyone expect the owner's space to have any furniture remaining.
I recommend to my seller clients that they remove any personal things from the public part of the property that will not convey, if possible. If there is anything major not staying with the property that is present at a showing, this should be disclosed at the very beginning.
We have sold many, many inns over the years - since starting this specialty division in 1986 - and I have seen the personal property list become a problem many times. We need to bring this issue to the table much sooner than we do both as sellers and brokers.
I have been on both sides of transactions both as a broker and as a buyer/seller. Both sides need to be reasonable but the greatest advice I can give is for sellers to remove things that will not be staying with the sale or identify them at first showing if they are non-negotiable items.
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