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.

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.

Kennebunkport

It was announced yesterday that Green Heron Inn in Kennebunkport is Under Contract. I remember when Green Heron had a breakfast restaurant open to the public and we would make sure to get down there early enough for showings to be able to stop in.

GHI is a great property - I'm very happy for the buyers and sellers. The Swan Agency Sotheby's International Realty's Keith Henley is handling the sale.

Buyers are telling us they want properties with year round possibilities, larger owner's quarters with a separate kitchen from the inn's , nice location and financially feasible. GHI fits the bill.

Kennebunkport is a very popular community for Inns and B&Bs with some of the best in Maine located here. December's Christmas Prelude weekend is as busy as some parts of Maine's July 4th. Extended season and close proximity to Boston make Kennebunkport an especially attractive destination for get aways.

Hopefully we'll be sharing another under contract announcement very soon - there is definitely buzz in the Inn/B&B market right now.

Negotiation

Negotiation in the classic diplomatic sense assumes parties more anxious to agree than to disagree. Dean Acheson
I really like this quote. It is so true that in order for a negotiation to be truly successful both sides need to start with the right attitude and both sides have to feel that they won.
A negotiation on an inn sale is particularly complicated as there are two things at work, valuing the business and valuing the home which, in this case, are the same thing.
A large part of the negotiation involves the seller realizing that their business value is the biggest component, this is what banks are going to look at most seriously.
The emotional part of the negotiation kicks in with the living quarters at the inn, are they minimal or are they almost like having a whole additional house? Key here is how much value the current sellers put on this when they were the buyers.
The bottom line is that inn negotiations are different than residential or commercial real estate negotiations. Once again, we see that these unique properties are a hybrid and must be treated by all involved as such.

Increase in Inquiries

We are seeing a definite increase in interest in our Inn/B&B listings. Bear Mountain Inn http://www.bearmountaininnmaineforsale.com/ Captain Lindsey House http://www.captainlindseyhouseforsale.com/ and East Wind Inn http://www.eastwindinnforsale.com/ have ALL had a spike in visits over the last week.

There were several showings this week and my colleague Dana Moos and I finished the negotiation on a pending sale of a high profile, beautiful Inn property in Southern Maine.

I am very encouraged by this level of activity.

Western Lakes

We are planning a tour of inns in the Lakes area of Maine for next week, a favorite! So many think of just coastal Maine and that is SO not all there is to Maine. In fact, it is fun to meet people that don't know anything about the Coast, they are all about the Lakes and Mountains, skiing and summer camp. I'm looking forward to it.

SOLD in Portland

West End Inn in Portland SOLD November 1st.

There are six guestrooms all with private baths - the 2010 income was c: $175,000. The property is year round and sold for $765,000. turnkey.

It is one half of a beautiful duplex townhouse on the corner of Pine and Neal Streets in Portland's coveted West End neighborhood.

The owners/managers use basement rooms as living space.

If you need/want more information on this sale you can email me at kim@swanagency.com.