DEFINITIONS - Categories of B&B/Inns:
Our industry defines the five (5) types of B&B/Inns as Start-ups, Lifestyle Feasible/Under-Performing, Profitable and Investment Grade.
- Startup - is property you already own or want to buy to create a new bed and breakfast
- Lifestyle - lacks sufficient income to cover all the expenses of the Inn, pay the debt service and provide a meaningful income to the owner/s
- Feasible or Under-Performing - has the potential to become Financially Viable/Sustainable.
- Financially Viable or Profitable - is an inn that has enough NOI to pay the debt service (mortgage) and a paycheck to the owner.
- Investment Grade - Refers to a hospitality property that generates sufficient income to cover operating expenses, debt service (mortgage), full time management and a profit to owners or investors. Typically, larger size properties.
ADR - CALCULATING AN AVERAGE DAILY RATE
Average Daily Rate is significant in determining the growth potential of an inn. Divide the Gross Room Revenue by the number of rooms nights rented over the course of the year. Note: This rate varies by the size of the inn, the region, and years in business. As occupancy increases so do variable costs. But as rates increase there is little additional costs.
365 Days - 10 Guest rooms = Possible room nights 365 days X 10 Rooms = 3,650 Room Nights
3,650 Possible Room Nights - Occupancy Rate 50% = 1,825 Room NightsGross Revenue $450,000
ADR - $450,000 divided by 1,825 = ADR $246.58
REV PAR - REV PAR IS THE REVENUE PER AVAILABLE ROOM
- Calculates revenue earned per room
- Rev Par is used to make an assessment regarding an Inn's operation and its ability to fill its available rooms at an average rate.
- An increase in Rev Par means the average room rate or occupancy are increasing.
- Define a period, identify rooms available and revenue generated and divide revenue by rooms.
March 31 days - 10 rooms available - Gross Revenue $450,000
Possible room nights = 31 days X 10 Rooms = 3,650
Occupancy Rate - 50% = 1,825 Room Nights
RevPar = $450,000 divided by 1,825 = $246.58
If an Inn is accurately pricing its rooms, the occupancy rate should increase and its RevPar should also increase.
NET OPERATING INCOME(NOI) Gross income from the Inn minus expenses, not including mortgages or owner's wages/draws or anything else not directly related to the operation of the Inn = NOI
Valuation MethodsThere are several ways to price or value a bed & breakfast inn, all of which have their place in certain circumstances, none of which is applicable in all cases.
- Gross Revenue Multiplier (GRM)
- Price Per Room (PPR)
- Cost/Asset Approach
- Capitalization (Cape Rate) - Financial Investment Analysis
- Comparable Sales Data - COMPS
THE GROSS REVENUE MULTIPLIER (GRM)The gross revenue multiplier (GRM), in many cases, can be a very useful tool. It is NOT capable of considering more favorable factors such as quality of location, property condition, level of business, land, etc. Sometimes applying a higher GRM allows for those conditions.
Simply multiply the Gross Revenue by a factor of Florida is about 4.75 to 5, and it varies in other states.
EXAMPLE:Sales price divide by gross revenue equals GRM
Price is $1,000,000.00 Room Revenues are $200,000.00 $1,000,000/$200,000 = 5.0 GRM
GRM can range from 2-10 or higher. 4-6 for businesses.
Remember It does not consider condition, innkeeper's quarters, land, or amenities.
PRICE PER ROOM (PPR)is calculated using the - Sales price divided by number of rooms equals price per room. Example: Price is $1,000,000; 10 rooms $1,000,000/10 = $100,000 per room
This is not reliable for B&B's. This method is mostly used in hotel sales and does not take into consideration property condition, amenities, owner's quarters (size and quality), acreage, or other important valuation factors.
As a result, it is a method that, while discussed in the marketplace and for purposes of broad generalization, is of little value except when compared against a very similar property.
THE COST/ASSET APPROACHis an educated estimate of price per square foot of construction with the land value and the value of the personal property which includes the Furniture, Fixtures & Equipment known as the "trade fixtures" to be conveyed with the sale to come up with a reasonable property price.
In pricing a bed & breakfast where neither GRM nor cap rate are applicable due to limited revenue, the cost approach and asset pricing approach can be combined to arrive at a base price.
EXAMPLE:Value of Real Estate, plus FFE, plus 1.5 times 1-year gross room revenue
- Real Estate: $500,000
- FFE $50,000 Depreciated Value
- NOI $75,000 * 1.5 = $112,500
- RE, FFE plus 1.5-year NOI
- $500,000 + $50,000+$112,500 = $662,500
CAP RATEis an Investment Formula/ Method For properties that have a significant cash flow and show profitability, a capitalization rate can be applied to help determine the price an investor might pay for a property.
This method uses net operating income (NOI) divided by a rate of return (or yield) to determine the price a person might pay, depending upon their investment criteria and the return on investment they are seeking or would expect in a similar property or business.
This is a valuable tool for those inns that operate at a sufficiently profitable level.
EXAMPLE:Price a property by taking the Net Operating Income (NOI), dividing it by the sales price.
NOI is $125,000, and the price is $1,125,000.
$125,000/ $1,125,000 = 11.1% cap rate
$24,000 / $300,000 = .08 or 8%
COMPARATIVE MARKET ANALYSIS - COMPSComparative Market Analysis is when a given property is compared to other similar properties that are for sale and those that have sold. Almost always used in residential sales. Usually available market data for a sold bed & breakfasts is limited by time and geography. COMPS
A fair amount of professional interpretation is required. When data is available, comparisons of the inn valuation are employed, especially regarding factors such as revenue per room, business mix, type of location, and style of business.