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.