The Innkeeper's Resource

2009 Inns For Sale Study Released

After much anticipation, the 2009 Inns For Sale Study researched by Hilary Jones of Inngenium, LLC was released at the recent Innkeeping Conference and Trade Show hosted by PAII, the Professional Association of Innkeepers International, in Atlanta.

The study, now in its fifth year, takes a snapshot of the bed and breakfasts and inns for sale in March of the year and breaks the statistics down into several categories by price, size, state, region, and the country as a whole. The core criteria is that the property be currently operating with two or more guest rooms, be for sale, and be advertised in at least one of several primary "inns for sale" websites.

In March, 2009 there was an increase over 2008 of 6.4% in the number of inns for sale across the country, rising to 990 properties. New to the study this year was an examination of how many inns had verifiably sold since the previous study. 82 properties had sold, indicating that there is currently a twelve year supply of inns for sale, assuming no changes and no additions!

On average, despite a soft economy and a devastated real estate market, prices on average were up 0.7% nationwide, though this varied by region and property size. The increase was "1.5% for inns in the 5-10 room class and 10.9% in the 12-15 room class. Prices did however drop for larger inns (17-40 rooms) by almost 2%." Regionally, prices trended up everywhere except in the New England, Pacific, and South West regions. Only the East North Central region remained static.

Another important observation of the study is that inns appear to remaining on the market longer with 21% being for sale for two or more years and 5% still available after three or more years. The B&B Team, sponsors of the study, believe that this 2-3 year time period to sell a bed & breakfast inn is not unusual, but there is clear statistical evidence to support this. Additionally, a large number of properties which are still operating dropped off the list in 2009, indicating discouragement with the marketplace.

In light of the large numbers of B&Bs and inns for sale, The B&B Team believes that the smaller properties, those that would be desirable as residences, should focus their efforts on selling as residential real estate rather than as B&B's. This will increase their owners' chances of a successful sale in a timely fashion. Inns that are viable going concerns should ensure that their asking price reflects what an over-saturated marketplace and lenders will find "reasonable and defensible."

1031 Exchange Warning and Advice

1031 Tax Deferred Exchanges are wonderful when they work, but we've just learned of a financial disaster and believe everyone needs to take note.

Simply put, a 1031 Tax Deferred Exchange is a mechanism whereby a real estate investor can roll over the cost basis from one investment property to another and defer paying capital gains taxes until the last property is sold and cashed out. In a transaction, a third party "qualified intermediary" ("QI") holds the funds from a sale until a new purchase is made following strict IRS guidelines. The QI then pays out the funds for the purchase and receives a fee for their services. The problem is, the industry of exchanging is not regulated, and here's what happened to clients of The B&B Team.

They sold their inn. Proceeds of sale went to a qualified intermediary per the rules. They had 45 days to designate new investments and 180 days to settle. After 45 days they hadn't found a property to buy, so they asked for their funds back, only to discover that there was no money! "It seems that he [the QI] invested client funds in Lehman Brothers auction rate securities probably as long as a year ago. When that market froze, he started funding exchanges with new client money (otherwise known as a Ponzi scheme). By the time we were to be funded, there wasn't any cash left."

This is an unmitigated disaster for these folks, and apparently there are a number of exchange companies recently that have filed for bankruptcy, so others have been hurt by similar schemes and problems. But don't throw out the baby with the bath water. There is a solution to protect yourself.

Our client goes on to say, "If someone wants to do a 1031, they need to make sure that the agreement states that their funds are to be kept segregated in an account in their name (very important) and that they specify how the funds are to be invested. In addition, they need to make sure they get copies of the bank statements. If the amount is more than FDIC covers, they might want a surety bond for the difference." To support this, our client adds that "The only one getting their money back so far is someone who did the above. The court ordered an immediate release of their funds."

In a time of greed and uncertainty, there seems to be no shortage of unscrupulous people. But bad behavior doesn't make a system wrong. It's people who are flawed, and people who can learn lessons. We hope you'll make note of this warning and advice about 1031 exchanges, so you can both take advantage of the great tax benefits inherent in them and protect your assets in the process.

Peter