Everyone has been hearing of people giving back in these troubled times.  The evening news even has a segment on special things that individuals are doing to assist others with a little happiness in times of need.  Now you can add a member of the Distinctive Inns of New England to that list. 

Rabbit Hill Inn, are proud members of Distinctive Inns of New England and Select Registry and are located in Lower Waterford, Vermont.  They have been involved with the Rabbit Hill for17 years and always have known the value of the dollar and understand the meaning of hard work.  They are now reaching out to individuals that have been laid off from their jobs and have developed a “Pink Slip Getaway” package, which is complimentary. 

How does the Pink Slip Getaway work?  If you have been laid off from your job for six months or more, they ask you to write a letter to the Inn prior to June 1^st and tell them about your personal situation and family.  They read each and every letter and to date have received an abundance of letters.  Each month they choose a special family to come to the Inn for an all inclusive weekend free of charge.  Recipients of the package enjoy all of the joys of the Inn, including a dinner, lodging, and more.  There will be six packages given away in total, one each month April through July, and again in November and December.

Now that is an Innkeeper giving back!

1.       The Numbers Don’t Lie?  Once again we are faced with an incredible array of numbers coming out of respected professionals who are trying to figure out the impact of the National recession.  The problem is that the numbers can be made to say anything, but a careful review will show that no matter whose numbers are used, the picture is not rosy.  Take for example the Gross Domestic Product (“GDP”).  The Government released figures in January showing a decline in GDP for 2008 of 3.1 %, the worst in over a decade, clearly signaling the fact that the recession was worse than most economists had predicted.  On February 27th, after the markets closed, the Government revised the GDP loss to a whopping 6.2 %.  Stocks world-wide are tumbling on that piece of bad news, in fear of a longer recovery period.  The downward spiral seems to continue with the report that even revered investor Warren Buffet lost $11.5 billion in the net worth of his Berkshire-Hathaway Corporation. 

2.      What is the impact on the Inn Business.  First, it is hard to get numbers for the Bed and Breakfast Inn business separately.  Smith Travel Research (“STR”) is the most respected source of historical numbers for the Hospitality Business, but does not collect data from small properties (under 50 rooms).  One data release from STR shows that New England seemed to be holding its own relative to the US National data.  For example, December, 2008 results for New England included a drop in occupancy rate of -2.1%, while Average Daily Rate (“ADR”) decreased by -3.6%.  This resulted in a huge decrease in Revenue Per Available Room (“REVPAR”) of -5.7%.  The National figures during the same December period showed larger decreases in Occupancy of -6.8%, in ADR of -3.2%, and a REVPAR decrease of -6.6%.

For the Year 2008 as a whole the figures are also instructive.  New England showed a decrease in occupancy of -2.8%, but an increase in ADR of 1.9%, resulting in a miniscule decrease in REVPAR of -0.9%.  The National figures for 2008 were far worse, with a decrease in occupancy of -4.2%, but an increase in ADR of +2.4%, resulting in a decrease of -1.9% in REVPAR. 

The numbers from STR show that, until about September, 2008 was a growth year with higher occupancies that dropped precipitously in the 4^th Quarter.  Rates were still climbing in December, as the Hospitality Business seemed to lag in discounting.  Overall, 2008 would be a down year, but only in comparison to the strong growth in the prior three years.

3.      New England is not the same.  One interesting thing that jumps out of the results shown by STR is that the New England States are not homogeneous.  In fact, it was clear in both the December and National results for 2008 that Northern New England (Maine, New Hampshire, and Vermont) fared much better individually than the Nation or their Southern New England counterparts.  For example, for 2008 as a whole, Vermont showed an increase in occupancy of +1.9%, an increase in ADR of 4.8% along with a REVPAR increase of +6.8%.  While the results in Maine and New Hampshire were more consistent, they were slightly worse than New England as a whole.   The bottom line was that overall, 2008 was a non-growth year, with a really cloudy picture for 2009.

4.      The Real Data comes from Sales Tax Revenues.  Another well respected source of industry research comes from Atlanta-based PKF Hospitality Research (“PKF”).   Utilizing results of sales tax collections in Maine, PKF reported that September lodging sales in that state dropped by -12% from 2007, and continued to drop by -2.6% in October on a year-to-year basis.  While Maine finished the year 2008 slightly ahead of 2007 (+0.7% growth in revenue), this came after 6% annual growth in the preceding three year period.  PKF is projecting as a whole a -7.8% decline in REVPAR for Maine in 2009, which would make it one of the steepest declines in recorded history since the 1930’s.  PKF also predicts that Maine will not fare as worse as others, because of its relative low cost and its rural location which fosters escape from the big cities.   Presumably this would apply to all of Northern New England with similar characteristics prevalent throughout the region. 

5.      Summary:  Batten Down the Hatches!  No one likes to consistently hear bad news, but there is little about the economy that seems to be saying that things are going to get better soon.  Predictions for a recovery in late 2009 and early 2010 are all that we have to go on, but most economists are hedging on those dates.  Similar to the broad-based declines in 4^th Quarter, 2008, retail spending, the American consumer seems to have switched to a survival mode, and this does not bode well for discretionary spending at least until there is some better news on the horizon.  We have advised our consulting clients of the following:

          a.       Budget for a decrease in revenue of about 10% for 2009, adjusting expenses as much as possible to that revenue;

          b.       Increase spending in Marketing, particularly electronic marketing to capture market share;

          c.       Neither increase or decrease overall rack room rates.  Develop packages with adventure travel features which show good overall value.  Up-sell rooms whenever possible, and include value-added options with all room rates.  Partner with local businesses and cross-market as much as you can. 

          d.       Hold discretionary spending to a minimum and build cash wherever possible in the event that this recession lasts longer than expected.  Do not defer necessary repairs and maintenance, but this is not the year to spend money on capital improvements. 

          e.       Remember why you came into the Hospitality Business. It is all about the guests and not the Innkeepers!

          f.        This too shall pass.  Look to the future, because the past is gone forever.

So you may ask, how does Blogging affect my Bed & Breakfast? The bottom line is that now is the time to get on the social media bandwagon and start Blogging your Bed & Breakfast. Blogging is one of the most cost effective ways to market, but it does take time, energy, and CONSISTENCY! Marketing has always been a challenge for Innkeepers, and we believe that it will remain that way. There are only so many hours in the day, but this does need to get done. If you can not commit to the time, you need to hire someone to do it for you and we would be happy to assist. So, here are the basics:

• Blogging adds fresh content to your website and this is the key to search engines;
• Blogs provides the public with the current “happenings” in your area/Inn;
• Blogs need to be hosted on your website, so that the fresh content is associated with YOUR website and not Blogger or WordPress;
• Blogs need to be written with key word rich content;
• Blogs need to be updated at least once per week, and more is better.

Not sure what to do next? Call us and we can guide you through the process. We can assist with developing the Blog, working with your web host to install the Blog on your website, and work as a “ghost” Blogger to make sure that your content is fresh and up-to-date.

We spent some time over the Holidays with our family outside of Boston. Rather than displace some of my nephews, we tried the closest hotel. This was a large chain hotel on a major route west of Boston with a huge shopping center across the street. While there were several small (3 room) bed and breakfasts nearby, we thought we should see what the hotel industry was up to. What a mistake!

First of all, we should say that the room itself was newly redecorated, fairly large and well furnished. The bed was a new pillow-top king-size, and the furnishings were standard up-scale hotel furniture. There was a very large, new flat-screen TV with Hi-Def capabilities. There was also free wi-fi and good desk space with plenty of lights and a.c. outlets. It contained the typical business set up with desk and swivel office chair in addition to two other upholstered seats. The heat was the ubiquitous through the wall air conditioning/heat unit, but with a more modern temperature control on one of the walls. The bathroom was standard size, but upgraded with a stone countertop, tile floor, and bowed shower curtain rod, giving the appearance and feel of a larger bathtub. In short, this was a fairly up-scale hotel room, the same to be found in most cities of the Country. What it lacked in charm, it made up with functionality; or so we thought.

We were using reward points left over from the corporate world for one of the two nights of our stay. This is where the trouble started. We had paid for our second night as a deposit, with the first to be paid for by the reward. The cost of the room was quoted as $99 plus tax. When we checked in, however, the desk clerk advised us that we would need to check-out and then check-in again on the next day. They said that they could not guarantee that we would be able to stay in the room, as room assignments for check-ins are made each morning. We advised them that they needed to figure it out, but we were not moving rooms. The next day we did, in fact have to check-out and then check-in again, but somehow they managed to keep us in the room. We then went to breakfast in the dining room. This was a holiday, so they were not serving a buffet. We were seated, and then waited about a half-hour for a server to bring the menus and coffee. Overall, the breakfast was sub-par and the service very poor. When we finally checked out, the desk clerk told us that since we stayed in the same room, which apparently was a higher level than the rate quoted us, we had to pay an additional $50, despite the fact that our written confirmation was clear. We, of course, refused to pay, and the desk clerk said she would discuss it with the manager. After we left, they just charged the difference to our card anyway. We are still waiting for the credit that they promised, but the credit card company will reverse the charge if the hotel does not do so.

The long and short is that in the battle between hotels and bed and breakfast inns, we win, hands down! It is not about luxury rooms, amenities, or discounted rates. It remains true that personal service, quaintness, and charm will win out every time. It is not just about the room. While our room was perfectly adequate, and in fact, in some respects a clear upgrade, it was sterile, lacking any “charm” or individuality. This room could have been found anywhere in the United States. Close your eyes, and you may not know where you are for a minute. One of the things about old house syndrome at bed and breakfast inns, particularly those in older, historical buildings, is that the sounds of the Inn at night, the groans of the boiler or creaks and pops of the radiators, can impact your sleep, at least on the first night. Well try those hotel thru-wall heaters which make a huge noise as they cycle on and off all night. I’ll take charm every time.

The most important thing that we have to offer in our small part of the Hospitality Industry is the personal service that our innkeepers give to their guests on a daily basis. This is what clearly sets us apart from the much larger hotel business, and the one thing that will help us survive the tough times to come. The more the economy gets worse, the more respite, peace and good old fashioned hospitality will be needed to provide our guests with a retreat to recharge their batteries. Do not ever underestimate what we have to offer the traveling public. It is something that hotels can never supply, no matter how many concierges they have. The hotels of the world will compete by price to stay alive. The bed and breakfast industry has a magic wand and can better compete with hospitality, charm, and personal service. For all times, this is what differentiates us from the hotel business, and what will continue to make us successful in the years to come. What we need now is to spread the world that we are open for business as usual, and that means “Hospitality” with a capital “H.”

During these difficult times of recession and the credit crisis, we have been thinking more about the use of Lease Options as a method of transferring Inns and Bed and Breakfasts. There clearly are some advantages for both Sellers and Buyers of Inns by allowing a faster closing period without the necessity of finding hard to secure financing. The universe of potential buyers is greater because the down payment (option price) and the closing costs are lower. Yet, I remain troubled about this method for both Sellers and Buyers. Here are the details.

First let’s describe the concept. The Lease Option is an alternative route to Innkeeping. It has been used over the years when financing gets tight or when the Inn in question is underperforming and cannot achieve normal financing. The way it works is that the Seller/Lessor leases the Inn property and business to the Buyer/Lessee for a five year term, keeping in place the existing financing on the Inn. The Buyer/Lessee pays an option price for the option which is less than a normal deposit for a purchase. The Lease is triple net, and the Lessee pays for all taxes, insurance, and maintenance costs. The rent is set at an amount sufficient for the Seller/Lessor to pay its mortgage on the Inn. In some cases the rent is lower at the beginning to enhance the ability of the Buyer/Lessee to improve the Inn’s business and make the Inn more capable of being financed in the future. In most cases a portion of the rent is also set aside as a credit against the ultimate option price, thus allowing the Buyer/Lessee to build up more “equity” in the Inn over the lease term. The Seller/Lessor retains title to the Inn and all tax incidences, including depreciation. Finally, the Option Price set by the Lease is received by the Seller/Lessee, but is not taxable until either the option is exercised or it expires by time or default.

From the Seller’s standpoint, they are able to get out of the active operation of the Inn and retain the tax benefits of ownership. They receive sufficient sums to continue to pay down their mortgage, and all operating costs are paid by the Buyer/Lessee. The Seller receives sufficient funds at the outset of the option to perhaps put a sufficient deposit on a new house or set aside funds for retirement without immediate tax consequences, but will not have a large payout to say buy a new business. One key point for the Sellers is that they still own the property, and thus, in the event of a default, can get back the Inn business faster than if they had to foreclose a mortgage. Overall, for a Seller that does not have immediate needs for the whole sales price, this looks on its face like a viable alternative, particularly where an outright sale is not possible.

From the buyer’s point of view, again, this looks attractive on its face for those Buyers who want to get into Innkeeping immediately, but lack the resources to make an outright purchase. It is clearly a cheaper route, with less of a down payment, and much lower closing costs (no appraisal or bank fees or transfer taxes). It gives the Buyer five years to develop and improve the business of the Inn, at the same time building up the equity under the lease and, hopefully, improving the overall value of the Inn while the option price remains fixed. However, for both Buyers and Sellers alike, this scheme is both illusory and full of risk.

Here is the main reason why this method is folly for both buying and selling Inns. The cash-strapped buyer is likely buying an underperforming Inn which usually requires an additional capital infusion of working capital in order to improve the business. Sweat equity is fine in a start-up situation, but does not necessarily work where real hospitality experience is needed to turn around a poorly performing Inn. Most of the Inns which are using lease options are full service Inns which are even more sensitive to needing qualified restaurant experience to improve the dining room parts of the Inn’s business. A new Innkeeper, even one with some restaurant or hospitality experience still has a huge learning curve just to run an Inn, let alone improve the restaurant business. The facts are clear that 50% of new restaurants in the United States fail after 3 years, with a whopping 90% failure rate after 5 years. This makes a lease option of a full service inn even more daunting when the new Innkeepers lack hands on restaurant experience.

Another issue follows directly from the fact that the costs are lower because no financial institution is involved. Without a bank being utilized for financing, there also is no third-party looking at the historical cash flow and tax returns of the Inn business, no independent appraisal of the Inn, and, in some cases, no real due diligence of such things as the structural integrity of the building and systems of the Inn. The simplicity of the transaction belies the fact that protections for the buyer are sometimes overlooked. For example, since no title insurance is needed for a bank, often this basic protection in a sale is not present in a lease option deal. If a title problem is found later in the process, perhaps when the option is being exercised, the buyer may be at risk after it has paid the option price and all of the lease payments. Thus, in reality, almost all of the normal sale due diligence needs to be done for lease options as well, making the cost saving factors perhaps irrelevant. Finally, in our experience, with this relatively unusual form of Inn transfer, Buyers do not always receive the legal protections that they need. For example, since the lease is subordinate to the Owner’s original mortgage, at closing of the lease, the Buyer/Lessee needs to receive a Non-Disturbance Agreement from the Seller/Lessors’s bank in order to protect the lease and the option from a foreclosure which may occur due to other issues of the Seller/Lessor with that bank. This simple legal protection may not always be included in such a deal.

Let’s not forget about the Sellers as well. If the deal fails, they get the pleasure of taking back their Inn, perhaps a long time after they had stopped being Innkeepers. The failure of the option is a hard thing to keep private from the buying public, and the result may be that they have to take back an Inn at a time when it is worse off from a business standpoint. Also, if the markets are as tight as they are today, the seller may really have lost a part of the value of the Inn, and be unable to sell it after such a failure.

What we have really seen in practice in the last five lease option deals in the New England area is the ultimate inability of the Buyers to turn around the operations, and the failure to either continue to make the lease payments or to achieve financing of the option. In those cases, each Buyer lost their option payments and ultimately lost the Inn. In some of the cases the causes were due to unforeseen maintenance issues arising after the lease commenced which stripped the Inns of needed working capital. In others, the new Innkeepers had transition difficulties and basically had little inability to run complex Inn operations including restaurants. In other cases, the importance of increasing web-based internet marketing eluded the new Innkeepers, making profit margins even more difficult to achieve. In some cases, the new Innkeepers just realized after a few years that the Innkeeping life was not to their liking, and they were willing to just walk away with nothing since they had no basic personal liability like what they would have for a mortgage in a purchase scenario. The likelihood, in most cases, is that the failure was a combination of all of the above, plus the post 9/11 weakening of the hospitality market that did them in. While all of these things can affect new Innkeepers who purchased Inns the normal way through financed sales, the fact that the financial institution utilized some independent review of the transaction seems to have had a moderating impact on the risk of failure. Most Buyers when facing the failure of their business will fight hard, and perhaps use other resources (such as a part of retirement funds) to make the Inn successful. In practice, we just do not seem to see that willingness to sacrifice all in a lease option situation.

With today’s tight financing and really slow real estate markets, there will be a lot of pressure on Inn Sellers to utilize lease options to achieve their goals. Likewise, Buyers may be convinced to go forward using these methods where they cannot put down sufficient deposits to achieve normal financing or where such financing is totally unavailable due to the performance of the Inn or the credit crisis. In either case, for the reasons stated above, we feel that using this method is both folly and very risky for both sides. It is highly unlikely that we will be recommending its continued use in our consulting practice.

Timing is everything. The following questions are meant to make you think about the realities of becoming an Innkeeper and the implications of this lifestyle change for you and your family. Innkeeping is a rewarding profession when it is done at the right time. Here are some things to consider:

• Does your partner share the same interest in Innkeeping?
• How will th is affect your family?
• Social life with friends and family is usually on weekends and holidays. These are the busiest times for an Innkeeper. Will this be an issue for you?
• Are you ready for a lifestyle change?
• Do you have the financial resources to purchase an Inn?
• Are you aware of the time commitment it takes to be an Innkeeper?
• Are you ready to leave the safety net of a weekly pay check?

These questions make for a good conversation with you partner. Keep an open mind and hear what your partner is really saying. If you are both in agreement, go forward and have fun!

We are frequently asked, “What are the characteristics of a successful Innkeeper?” This is an important question to ask. It takes the right kind of person to be a successful Innkeeper. The following are six personal traits a successful Innkeeper should possess.

1. Ability to Serve Others
2. Multi-tasking as everything always happens at once
3. Ability to make it all look easy!
4. A Sense of Humor because if you can’t laugh, you will cry!
5. Commitment to being an Innkeeper, not just a whim
6. Organized, organized, organized…

So do you have what it takes to be a successful Innkeeper? If not, just sit back and enjoy visiting Inns instead! We would rather that you find this out BEFORE you purchase a Bed and Breakfast. Remember, it is much easier to “buy a Bed & Breakfast” versus “selling a Bed & Breakfast”.

Many people decide to become an Innkeeper before they really understand what innkeeping is really about. Innkeeping is a satisfying career. However, if this major decision is not approached honestly, your dream of becoming an Innkeeper can easily become a nightmare! We consider the following the basic five questions a Future Innkeeper should be asking themselves BEFORE they make the commitment to purchase an Inn. These questions cover the who, what, when, where, and how of Innkeeping. We will explore the following questions during the next four week period. Be sure not to miss out!

• Who makes the best Innkeeper?
• What is the typical day at an Inn?
• When is the best time to purchase an Inn?
• Where is the best location?
• How do you go forward with an Inn once it is identified?

If you would like to join our e-mail list, we can send these all to you today, otherwise…stay tuned!

Thanksgiving is perhaps the best Holiday at a Country Inn. It is the one time that the Innkeepers get to really share their Holiday time with the guests and neighbors and to show their thanks for both a bountiful season and the joys of Innkeeping. I know that we looked forward to this Holiday every year at our Inn.

It is a great time to share an amazing, traditional Thanksgiving meal with the community. Often we welcomed both lodging and dinner guests to the Inn whose families were far away. This gave us all a chance to celebrate a great Holiday as a kind of substitute family. The spirit of Thanksgiving permeated the air as the fantastic smells from the kitchen provided a welcoming touch to the Fall decorations at the Inn. A moment to stop to give thanks for all that has been given to us, and then a traditional meal served family style with seconds passed until no one could ever want more. Good cheer, great food, good music, and the laughter around the dining room was reward enough for this very special day. For those guests staying over at the Inn, we always brought out the leftovers that night for home-style sandwiches and pie. This was always a very special treat for our guests.

In this year of changing times, we give thanks to what we have, and renew our energies for the work to come.

Happy Thanksgiving to all!

The most recent news from the Hospitality Industry is not good for Innkeepers. Hotel REIT giant, LaSalle Properties announced it was cutting 20% from its hotel staffing (mostly run by large hotel management companies) and has rescinded its 2008 guidance to the stock market. LaSalle reported that its Revpar (revenue per available room) decreased by 11.4 % in October; a huge drop! While the Innkeeping Business does not use Revpar as a measurement, it is fundamentally the same as saying that average daily rate and occupancy combined dropped by that amount. LaSalle is an important bell- weather for Inns because it is comprised of mostly luxury and higher-priced hotel properties. For the full story, please see: LaSalle Orders 20% Cut in Hotel Staffing – WSJ.com.

We hear anecdotally that many Inns and Bed and Breakfasts across the Country have had good years in 2008, at least until the end of October. Now is not the time for Innkeepers to rest on their laurels. A sea change is coming, in the form of a recession, the likes of which we have not seen in our lifetimes. This is also not the time to just burrow in fear of what is to come. As we have said many times before, when there is a downturn, those Inns at the top of their game can improve market share as against the competition. A bigger piece of a smaller pie may save the day after all.

So this is the time to be countercyclical and increase your spending on marketing, especially electronic marketing through your website, blog, and by email. Create attractive packages rather than discount, and spend all of that extra time you have due to declining occupancies to come up with creative and imaginative ways to get your repeat and referral guests to the Inn. Most of all, just lowering the price will not work, and may make things worse in the long run (see previous article on Discounting).

Most of all, have heart. The biggest reason that they come back to the Inn is because your have created a refuge and a respite from all of the problems the guests face at home and in the real world. Remember that this is exactly what the guests need in these troubled times, and they will pay you for this experience.