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Friday, August 11, 2006

An interesting article in the Wall Street Journal about Bed and Breakfast Inns

In today's Wall Street Journal they talk about how property values in California and elsewhere having been driving innkeepers to sell as single family homes, rather than continue to have guests. We know this first hand as the inn 5 houses away from us just sold as a residence! While that may be good for us as we may now get some of their previous clientle, there are now 4 fewer rooms to be had in Placerville.

We also have an association of innkeepers in El Dorado County, and now we have less members, which means possibly fewer ideas being generated and less income to do collaborative marketing.

Here is the article from the Wall Street Journal from August 11, 2006

The Endangered B&B

Inns Turn Into Private Homes,
As Pinched Owners Cash Out;
Rumsfeld Checks In for Good
August 11, 2006; Page W1

Bed and breakfasts have thrived for decades by promising to make guests feel like family. Now, a number of B&Bs are being taken over by families who have no intention of leaving.

In a side effect of the real-estate boom, scores of traditional bed and breakfasts are closing down as new buyers turn them back into private residences. Behind the vanishing inns is a simple equation: Many B&Bs are worth more as properties than as businesses. And with the real-estate market showing signs of softening, innkeepers now have an immediate incentive to sell out and reap a windfall. Rising interest rates have also made it more difficult for innkeepers to pay the monthly mortgage and still turn a profit by renting rooms to weekenders.

The Sardy House, Aspen, Colo., Renovated and ready, private buyers welcome. Asking price: $20 million.
As a result, many operators have served their last apple pancake. In Lenox, Mass., tree-lined Cliffwood Street has one B&B, down from three in the late 1990s. In Cape May, N.J., the owner of the Columns by the Sea turned her beachfront B&B into separate condominiums she's selling for up to $1.5 million. In Aspen, Colo., the owners of the Sardy House converted the inn into a six-bedroom single-family home, now on the market for $20 million. (The property also comes with a townhouse and an eight-bedroom carriage house.) In late 2003, the owners of Mount Misery Bed & Breakfast in St. Michaels, Md., decided it wouldn't be much use wooing would-be innkeepers, so they marketed it as a private home. It sold, for $1.5 million, to Secretary of Defense Donald Rumsfeld.

The dynamic is playing out across the country. The California Association of Bed and Breakfast Inns says seven of its members sold their properties last year -- each to buyers planning to convert them into private homes. Overall, the Professional Association of Innkeepers International says the number of rooms in B&Bs and country inns decreased 11 percent in 2004 compared with 2002, to 148,000, the latest data available. (The PAII uses "inn" and "bed and breakfast" interchangeably for small lodgings that serve breakfast, with places that also serve dinner labeled "country inns.") The innkeeper association has seen the transformation firsthand: Since 2000, three of its seven board members sold their own inns as private homes.


See what some B&Bs are doing to woo guests.That means fewer options for travelers like Linda Myers. For 15 years, the auditor from Hayward, Calif., stayed at the same B&B when she visited Ashland, Ore., for the Oregon Shakespeare Festival. Ms. Myers liked reading on the home's park-view porch and staying up late to talk Shakespeare with fellow guests over lemonade and cookies, things she couldn't do at a motel. But about a year or so ago she received a form letter saying that the place had been sold. "It was a 'To Whom It May Concern' kind of thing," says Ms. Myers, who has found a new B&B in town. "I was sort of hurt."

'Like Making Beds'

Historically, bed and breakfasts have sold for four to six times a year's gross revenues. Under that model, new owners could afford to buy a home, pay the mortgage and expenses and bank the difference. But because real-estate values have soared so quickly the formula no longer works. Now, such homes are selling at eight times annual revenues, and often much more. Revenues, meanwhile, are up only slightly: The average bed and breakfast room price is $144, up about five percent since 2002, according to PAII.

Deer Creek Inn, Nevada City, Calif., Still a B&B, but owners may sell. They paid about $1 million for it in 2004.
For many operators, rising home and mortgage costs are the final nail in the coffin. Bed and breakfasts have traditionally been low-margin businesses that work best when home payments are small. Rising costs for liability insurance cut further into bottom lines. And these inns run some of the lowest occupancy rates in the hospitality business. Hotel rooms now stand at close to 71 percent occupancy, according to Smith Travel Research. In part because B&Bs depend less on weekday business travel than on seasonal and weekend guests, their occupancy rates are closer to 41 percent, according to PAII.

Running an inn becomes a labor of love, says Bill Carroll, senior lecturer at the School of Hotel Administration at Cornell University. "You had better like making beds," he says. "Unless you're getting some psychic value out it, I have trouble understanding how you can make a business of it."

The math isn't working for Eileen and Ken Strangfeld. In 2004, the couple spent about $1 million on the six-room Deer Creek Inn in Nevada City, Calif. Though they were able to offer $400,000 down, their only willing lender was the Small Business Administration, which offered a commercial loan with variable interest pegged to the prime rate. With rates rising, the couple's debt payment -- which, at about 10 percent currently, is about four points higher than the national average for a residential loan -- has increased to $5,800 a month from $4,300 a month. This eats up about half of the inn's $140,000 revenue, they say. Much of the rest goes to taxes, part-time worker salaries and other overhead.

When they have guests -- who pay $160 to $225 for a room -- the Strangfelds get up at 6:30 a.m. to make breakfasts like mushroom and spinach strata and pancakes topped with yogurt and fresh fruit. They do dishes, wash towels and sheets, stock bathrooms with homemade bubble bath and rake under the yard's century-old cherry tree. While guests sip wine from five to six, Mrs. Strangfeld asks about dietary restrictions before making an evening shopping trip. They answer Web inquiries before hitting bed at 10:30 p.m. They do not draw salaries, they say. Their annual profit is around $5,000.

Angel House, Park City, Utah. No room at the inn: Private buyer paid about $2 million for it in 2004.
None of that is a concern for those who have the cash for a vacation home. A few years ago, Rick Kuhle was staying at the Angel House Bed & Breakfast in Park City, Utah, a century-old, slopeside property just a short walk from Park City's main village. The owners mentioned the place was for sale, but that they hadn't been able to sell it as an inn. Mr. Kuhle, the president of a shopping-center developer in Phoenix, paid about $2 million for the 10-bedroom inn and transformed it into a seven-bedroom home. As soon as others found out what he was up to, he says, they offered him as much as $2.5 million. He hasn't sold. Meanwhile, the house still attracts vistors. "Once in a while people walk up and ask if it's still for rent," he says.

Few of these inns are in move-in condition, however. B&Bs often keep kitchens and living rooms small to leave space for money-making bedrooms. Bathrooms are myriad: Many properties have a dozen or more spread over a few thousand square feet. Plus, while home buyers typically prefer unfurnished space, many B&Bs come with everything from heavy furniture to antique butter dishes.

In Colorado Springs, Colo., the Room at the Inn is for sale for $1.23 million, and owners Dorian and Linda Ciolek say they'd prefer to sell to a prospective innkeeper because they'd like the sale price to include the antique furnishings that came with the place. They figure the collection is worth $250,000, including a nine-foot-tall buffet, hand carved from oak, with glass-front cabinets for crystal wine glasses and silver tea sets. "We probably wouldn't have this in our house," says Mr. Ciolek.

Petting the Cat

The B&B industry is one of the latest to be impacted by this decade's real-estate runup. Golf courses have been razed to make way for home developments and tennis courts have been replaced by shopping centers, while many communities have seen summer camps cash in their land holdings. The inns also represent an old-style approach to traveling at a time when hotels are offering very different sorts of amenities. While new hotels pitch in-room exercise equipment, spa wings and loads of anonymity, the classic B&B experience includes communal breakfasts, small talk with fellow guests and invitations to pet the host's cat.

Pleasure Point Inn, Santa Cruz, Calif. Privacy pays: THe inn has separate entrances for three of its four rooms.
Loosely defined, the B&B is a centuries-old industry, common throughout the United States and Europe. The inns started showing up in many travel guides in the 1960s, and interest grew with the 1980s TV show "Newhart," whose main character traded a career as a New York writer to become the proprietor of a Vermont inn. PAII was formed in 1988, and the trade organization estimates that the country's 20,000 inns generate some $3.4 billion in business. In urban cores and small towns alike, B&B owners have been among the first to kickstart gentrification by renovating dilapidated buildings, underwriting the cost by taking in guests.

As the business model comes under pressure, many newer inns are moving away from the properties' small, communal roots. For example, the Pleasure Point Inn in Santa Cruz, Calif. -- a four-room place that charges $225 to $295 per night -- added private entrances to three of its four rooms a few years ago, and now allows guests to eat breakfast in their rooms. Other operators are opening minihotels with two dozen or more rooms that are built instead of converted, with amenities like gyms or small spas. According to PAII, the proportion of bed and breakfasts that were built from the ground up -- which tend to be bigger than traditional B&Bs -- increased to 17 percent in 2004, up from 13 percent in 1998. This is partly because it is more efficient to operate more rooms, with inns that have 21 rooms or more generating more than $500,000 a year and profit margins of 30 percent or more, according to PAII.

Not everyone is upset at the thought of fewer B&Bs. Scott Hutchison doesn't care for the communal experience, he says, but he has endured three stays because his wife is a fan. The Chicago advertising manager says that if he goes to one, he at least tries to skirt the common areas. "Everytime I've been to one it comes to the dinner hour and there's some old guy with long hair playing acoustic guitar -- just hanging out, wanting you to hang out by the fireplace with him," he says. "I'm just not really into pseudo weekend friends."

Still, many fans remain -- among both guests and innkeepers. The Strangfelds of Nevada City, for one, are thinking of selling their B&B -- and building a new one close to their grandchildren in Oregon. "You get to live in a beautiful home in a beautiful setting," says Mrs. Strangfeld. "And when I have a day off, I'm already in the place that I would vacation at."

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