The Innkeeper's Resource

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

Innkeeping Success Without Discounting

These are tough times, no doubt about it. They were tough for the lodging industry after 9/11, too, and the immediate response was to discount rooms in hopes of filling them. Back then it worked, sort of, but the long term consequence was a period of several years to rebuild ADR and RevPAR. So what's an innkeeper to do? David King, CEO of Fulcrum has an article in Chief Marketer with a few suggestions, which I relate to innkeeping.

First, it's important to remember that discounts don't automatically equal value. Just because something costs less doesn't mean it's really nice. It may just be what a person can afford now, and when he can afford more he'll upgrade again. You never want anyone to think that your fabulous guest rooms are "cheap." But you do want them to know they are great value, regardless of price. Maybe they get something extra that adds value (flowers, a split of wine, a gas card) or a service (breakfast in bed, personalized tours, or reservations at the "impossible to get into" restaurant). Think about what you can do to increase value without discounting your rate.

Safety and security are important to consumer perceptions of value. It's one of the reasons that B&B's have been the lodging of choice for many female business travelers for years. They are perceived as safer than an anonymous motel. So, if you've got a wonderful, safe, homey, cozy place to be, emphasize it in your marketing. It's a great added value that your guest receives in addition to all the personal service you provide.

Especially in these times, remember that not all of your guests want the same thing. In fact, you may be getting some new guests that have never stayed with you or at a B&B before. Take advantage of the opportunity to introduce the joys of a distinctive, unique lodging experience and cultivate them for the future. Emphasize the fact that you can (and will) customize their guest experience. If they have limited resources, they want their dollar to go far. Innkeepers are uniquely poised to customize and deliver.

While you're at it, you should also recognize that some of your new guests may be different. As the world changes and travelers use different tools to plan and book their trips, whether for business or pleasure, either you are reaching them in their own language and providing them with what they want or you aren't. This is a great time to zero in on the i.guest, capture their attention, and keep them coming back.

There has never been a more important time to understand and care about your brand as an inn. What do you represent? Why would someone stay with you over another inn across town or across the state? If you have a clearly defined brand, nurture it and promote the heck out of it. And if you're not really sure that your brand message is clear (or even what that message is), you are probably missing an opportunity to build guest traffic and loyalty. Show people what you stand for, and deliver on that promise. Get help if you need it.

Finally, while you look for ways to survive this economic downturn in the short term, don't forget the medium and long term. In tough times, one of the first variable and discretionary costs that many businesses cut is advertising and marketing. This, along with aggressive discounting, starts a downward spiral that can cause some inns to fail. Plan carefully, and, if possible, increase your marketing spend to attract more new guests to your inn. If you think it through, you can build a solid base and increase your share of the pie even as others bemoan "the economy."

David King concludes, "There is no doubt that consumer and business customers will be seeking value in response to the pain and uncertainty in the economy. But smart marketers with the resources and vision to consider other steps will survive by doing more than rushing to the lowest common denominator." At The B&B Team, we couldn't agree more!

Peter

Innkeepers and Taxes. Are Yours Done Yet?

Every year on April 16 many of breathe a sign of relief that our tax returns are finally filed and (gulp) we've stroked a check to Uncle Sam for what has hopefully been a profitable year. Procrastinators file extensions but still have to pay up. Many innkeepers, especially those with smaller properties, are often pleased that they don't, in fact, have to write a check to the government, because, on paper, they didn't make any (or not enough) money. It's the magic of cost recovery, which is what we call depreciation these days.

Depreciation is a wonderful thing for real estate investors and people who own business equipment. It saves money in the short term. And, if a bed & breakfast has been successful and had a profitable year, the depreciation helps soften the blow at tax time. But there's a danger in obsessing too much about paying (or avoiding) taxes.

Many innkeepers run their business as if avoiding taxes was their reason for existing. You run your food through the business, your car payments, your vacations, your club memberships, and maybe you don't bother to allocate the portion of utilities and property taxes that are not exclusively for business use. And your bottom line looks terrible. Yay! No taxes this year! But guess what? There's a price to be paid when it's time to sell.

Buyers of bed & breakfast businesses, if they are looking for a business and not a hobby and tax shelter (which B&Bs are great for) are scrutinizing financials very closely. Banks are looking even more closely. It isn't going to sell the inn to tell someone that you really do make money if only your personal expenses weren't all run through the business and showing as deductions on your tax return. If you're selling an inn business, and there's value in the business, you must show as healthy a bottom line, net operating income, as possible. This is what creates value, and it's what a buyer can take to a bank.

So, if you plan to sell your bed & breakfast inn in the next 3-5 years, now is the time to clean up your books, take only your allowable deductions, and show as much profit as you actually can. Depreciation will still soften the hit, but look at it this way: If you have to pay taxes, it's only because you actually made money. Yay! (That's a real cheer this time!).

Peter

Online Reviews Impact Bottom Line

There's been a lot of news lately about online reviews, and sometimes it's hard to know how to measure their impact on innkeepers. Well, now we have some great statistics to share. A recent article from TravelMole reported that The Kelsey Group and comScore.com did a joint research project that focused on hotels (lodging), restaurants, travel, and other areas. The impressive bottom line was that people were willing to pay at least 20% more (and up to 99% more) for services (like lodging) that were rated "excellent" (5 stars) versus "good" (4 stars).

Furthermore, the study showed that 24% of Internet users read online reviews before making a purchase decision, and of those, 40% subsequently stayed at the hotel they reviewed online. Hotels ranked the highest of all categories in that 87% said that the reviews had a significant influence on the decision to book a room. More surprising, still, was that a full 97% said that the reviews were accurate!

So, what does this mean for innkeepers? At The B&B Team we've been saying for some time that Travel 2.0 was important for the unique lodging industry. Sure, the studies are looking at hotels, but B&B's and inns are in the lodging category, and we all know that you're being reviewed online, like it or not. So, when was the last time you checked out your reviews? If you're not looking, and if your guests aren't saying nice things about you, and if the experience you offer isn't up to your marketing hype, then you're problably leaving at least 20% of your potential revenue on the table.

To measure that 20% another way, consider this: If your inn could gross 20% more revenue, and your expenses stayed relatively similar to what they are now, that's a LOT more net operating income at the end of the year. And, in the parlance of inn valuation, if we used a 10% capitalization rate, for every $10,000 increase in net operating income, your inn could be worth $100,000 more! Don't believe that social media and online reviews have an impact? Think again!

Peter

This is how marketing is done...

It's always exciting to find inns that really "get it" when it comes to marketing their properties. It's not that there is just one way to do it, but that most successful inns follow one consistent pattern: they all pay a great deal of attention to what is happening: at their inn, in the marketplace, and in trends that will affect them.

I recently did some work at The Folkestone Inn in Bryson City, NC. This is a true country inn, rural, close to Smoky Mountain National Park, the Cherokee Indian Qualla Boundary, and the Nantahala Outdoor Center, to name but a few attractions. At 10 rooms, Folkestone Inn isn't huge, but it's big enough to be a viable business. One of the things that impressed me is the way the owners track their business. They want to know not only what is happening now in real time, but how that compares to last year and the year before. If there's a change, they ask themselves why? What are the leading indicators that would suggest a reason for a change. What should they be doing to anticipate a change or even a recurring event? They have beta tested almost every reservation system to pick the one that works best for them, for the information they want to be able to analyse. They have real time online booking. And they utilize a professional phone service when they are away, even for a few hours, to be sure a human answers the phone whenever possible.

They leave their web work to professionals, but they direct those pro's as to what they want featured, and when. They artfully integrate the style of their inn with the amenities they offer. Scrupulous attention is to paid to the basics like extreme cleanliness and good food. They monitor websites like TripAdvisor to know what people are saying and plan to put those reviews on their own site. In short, they pay attention to the details.

Importantly, they spend their time on the high value tasks which they can do better than anyone and hire the help that is easier to come by (not that great housekeepers are easy to come by, but you know what I mean!). Are they blogging yet? No, but who knows what the future holds once The B&B Team gets our hands on them!

Peter

Furor Over Mortgages Creates Opportunity

The past month has seen some pretty dramatic gyrations in the equity and mortgage markets evidenced by near panic on Wall Street and, no doubt, in some homes. If you're thinking about becoming an innkeeper, we always say that you need to take stock of your assets. They may be less today than a few months ago if the majority of your net worth is in your home, but those assets are still there and will recover.

In the meantime, the basic principles still apply: know what you have, save what you can, keep your total debt levels low and credit scores high, keep learning about the wonderful world of innkeeping, and keep looking for quality bed and breakfasts and inns that make money. That is, if you need to pay the mortgage from the business.

But why is this an opportunity? Well, even though some mortgage money is tighter today than even a month ago, there's another positive benefit for prospective buyers: with the flood of inns for sale and higher interest rates, prices should be coming down. If you find a good property but the price doesn't seem right, don't despair. Study it. Figure out what it's really worth based on what it can honestly support. And then make an appropriate, fair offer. You might be surprised that you'll be able to buy a bed & breakfast for less today than last year.

The truth is that markets always balance themselves out. And, for innkeepers wanting to sell now, you might need to reconsider your price. Our hope at The B&B Team is that this market correction will restore some balance to the country inn marketplace and open the door to even more people becoming innkeepers and more innkeepers exiting gracefully.

Have you had an experience buying or selling recently? Did the outside world affect your transaction? Please share you experience by commenting here.

Peter