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Mr. Hurn

Finance & Investment

7 Tips to Wealth-Creation Through Commercial Real Estate Ownership

By Christopher G. Hurn, President & CEO, Mercantile Commercial Capital LLC

Maintaining a profitable and successful hotel can be difficult but rewarding. The hard work and attention to detail that are essential to creating a desirable and competitive hotel can be overwhelming, so much so that some hotel operators often disregard one of their best investment options for achieving wealth and financial success. By investing in the ownership of the commercial property, in addition to operating the hotel on which the property is housed, hoteliers can reach their ultimate financial potential and enjoy a more lavish and secure lifestyle.

Hoteliers and franchise operators that own the property find themselves in the advantageous position of building a healthy nest egg for themselves when the time comes to execute their exit strategy. It makes a great a deal of sense to "pay yourself rent" rather than a landlord if the plan is to someday sell or close the business. Once the capital for the down payment becomes available, business owners should consider turning their rental payment into a mortgage payment. This enables them to begin building equity in an appreciable asset that offers multiple tax advantages and income-sheltering opportunities.

The following tips can take some of the stress out of buying and owning commercial real estate:

  1. Get organized. Most competent lenders can provide borrowers with a checklist of the documents that they will need in order to complete the transaction and obtain all of the necessary financing. Full documentation loans, which include SBA 504 loans, are especially appealing because they typically offer better terms and interest rates. Just a few tenths of a percent in the interest rate can add up to tens of thousands of dollars, if not more, over the life of a commercial loan. And, longer loan terms mean better healthy cash-flow for hoteliers looking to grow.

  2. Research the current market. Most hoteliers and franchise operators don't have time to go on endless excursions shopping for the right property. They rely on knowledgeable commercial realtors to help pinpoint the right property that exactly fits the business' needs or requires only minor renovations. Plus, good realtors have comparable sales/lease rates in the area and information on its demographics as well as plans for future development.

  3. Use low down payment and longer-term loans. These loans preserve capital that could be used to add staff or other resources to growing enterprises. Small business owners no longer have to put down 20 to 30 percent or accept 15-year amortizations with short-term rates that eventually balloon in order to get a good deal. SBA 504 loans, for example, are an ideal option for up to 90 percent loan-to-cost financing and up to 25-year terms. They are one of the keys to success for many smaller hotel operators.

  4. Consider adding furniture, fixtures and equipment (FF&E) into the commercial loan. Since the FF&E costs comprise a minority of the overall project costs and the FF&E items have a relatively long projected lifespan with the business, hoteliers are able to add them to their SBA 504 commercial real estate loan. This can greatly improve the hotel's cash flow, and it enables the business to enjoy added tax savings with shorter IRS depreciation schedules.

  5. Consider buying/building more square footage than needed at the moment. The extra space can always be grown into, and in the meantime it may allow the owner to offset their costs with rental income from retailers, coffee shops and other local businesses. In virtually all situations with SBA 504 loans, the borrower must occupy at least a majority of the space, but this will nearly always be the case with hotel properties.

  6. Always establish a real estate holding company or what is known as an Eligible Passive Concern (EPC) to own the new property. The formation of a master lease between an EPC and the operating hotel company will tie the two together. If the hotelier later decides to sell the operating hotel business, they can keep the real estate company and property to lease to another hotel operator and generate considerable income. This makes owning commercial property an ideal retirement investment for small business owners.

  7. Only work with a commercial loan specialist. Time is precious, so only deal with a lender that specializes in commercial loans. Involving residential mortgage brokers or bankers in the transaction will only slow the process down, and their inexperience will usually lead to poor loan terms and high fees for the borrower. Always make sure your hotel lender has actually financed other hotels previously, and don't be afraid to ask for references or seek out testimonials.

For those in the hotel business, purchasing a property can be one of the most rewarding investments that a business owner can make. These tips provide helpful guidelines, but it is important for hotel buyers to work with highly experienced and qualified lenders who offer SBA 504 loans. These loans represent the most favorable financing option that is available for businesses that wish to buy or build their own facility. They have helped scores of hoteliers to acquire their own property in the past, and the use of 504 loans in the hotel industry is expected to grow dramatically in the years to come as banks continue to tighten their lending standards.

Christopher G. Hurn is the President and CEO of Mercantile Commercial Capital LLC, one of the nation's leading providers of SBA 504 loans for small business owners wishing to acquire or develop their own facilities. Previously, he worked as a senior management consultant, financier and executive with companies such as GE Capital, Heller Financial and NAI Realvest. Mr. Hurn attended the Georgetown's Law Center and holds a Master's from the UPenn's Fels Center (formerly at the Wharton School of Business). He earned two Magna Cum Laude Bachelor degrees (B.A. and B.S.) from Loyol. Mr. Hurn can be contacted at 407-786-5040 or churn@mercantilecc.com Extended Bio...

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