Example: Purchasing a Hotel / Pub, Plenty of Money Down

That's one hell of a story

 

Well hang on, we aren't done yet!

 

I haven't stop listening (reading)! Suspense....

 

Disaster! It’s still hard to contemplate that morning without feeling a strange mixture of anger, regret and even terrible shame. I only ever talk about this anonymously after all. I haven’t had this detailed a conversation about the whole story ever.

So this is now five years after I first got into the business and about 2.5 years since buying the freehold. I skimmed over the $650k equity first time around but that has an added level of pressure to it as it included my parents and my in-laws PPOR’s. Fudge. I’m totally fudged at this point. Broke, all assets tied up in this deal, even the money in the tills is taken by the Receivers as we are escorted off the premises.

Over the next few months we reach out to everyone who’s ever even looked like a lender or broker to see what our chances are of getting the pub back. One finance group say all the right things and get a reasonable up-front fee of $15k out of us, borrowed from my younger brother (plumbing new shameful lows), which all comes to nothing when the fire sale valuations, which cost us $6k don’t stand up to the new claimed debt by the bank.

We blow a few other borrowed thousand dollars chasing brokers and lenders of last resort but it all comes to nothing. About three or four months later the freehold and leasehold go to auction as a single sale and get passed in for about $1M. About $1.5M below what it owes us. We are working with a Sydney based lawyer, recommended by one of the last resort people, to get it all back still at this point.

About 6 months after the Receivers we relocate interstate for PAYG jobs. Nothing much happens apart from legal manoeuvring over the next year to eighteen months until we receive summonses for a summary judgement hearing. Our Sydney lawyer recommends a Melbourne based solicitor to represent us in person, at which point we find out he’s not done any of the work/correspondence he’s claimed to have done over the past year.

About another $10k in legal fees later we find out the pub was sold – lock, stock and two smoking barrels for $1.1M – and coincidentally the Receivers fees to that point are $1.1M, so we still owe the banks $2M for the building and $250k for the business.

You may remember I referred to refinancing the business and that this was a rookie mistake. This refers to fixed and floating charges. When you take out a business or commercial loan, banks will place a charge (fixed and floating) over the assets of the Pty Ltd/Trust structure in case you go broke so they can sell all your assets to recoup their money. The charges are ranked by date. First dated charge gets first bite at the apple. In theory my business loan should have been paid first from any proceeds, but by refinancing to another bank I’d inadvertently changed the rankings and doubled the number of banks chasing me for money.

I lodge Financial Ombudsman complaints for the third party equity (3PE) – mainly to slow the process down and get some time to figure out a way of fighting back. I also lodge one for the business loan and the building loans. This stops legal proceedings until dealt with. The building loan complaints are dismissed as they are over the upper threshold for FOS to deal with but it takes a few months due to the FOS caseload.

I read a lot of caselaw, probably misinterpreting most of it. Commercial Bank vs Amadio springs to mind, the great hope of everyone claiming unconscionable conduct from a bank (lawyers will laugh). The 3PE complaint centres on the fact of no benefit to the 3rd party as they weren’t part of Pty or beneficiaries of the Trust. After over 6 months with the FOS, the bank agrees to release the 3PE security without admission. Score one to the little guys.

So 2.5 years after the Receivers arrived we had our first mediation session with the building loan bank – kiss goodbye another $15k in legal eagle fees. We reach a settlement which involves us paying a low six figure sum and them writing off the remaining seven figures. Not a great result considering, but could have been much worse. We have terrible credit ratings still so a maybe 3rd tier lender writes us a new mortgage on the PPOR to pay it – thank goodness for equity ;-).

This leaves the business loan which is still with FOS with the usual raft of claims. I received an updated loan statement several months after the first settlement showing a zero balance. The business loan bank had decided to write the loan off and forestall any further FOS determination. Score another to the little guys - I've never understood why they gave up on it but after 3 years of being unable to move on it sure was appreciated.

So that's 3 more years of wrangling after the event. Us not taking a $50k arrears seriously enough and perhaps some over-reaction from a bank cost both of us seven figures in the end.

 

It was a pretty awful 8 year stretch but at least we fought and learned a few lessons along the way. It could have been much, much worse! We preserved our PPOR and some blocks of land in our hometown and ended up with decent PAYG jobs.

 

Banks must rank right next to shopping centre management as my most favouritest people. Real estate agents ain't got nothing on them.

 

So that's how you buy a pub leasehold and freehold and some of the things I wish I'd known of/considered along the way. It's also an indication of how quickly it can all go wrong in a business that has high fixed costs. Since then I can think of 3 nearby pubs that boarded up, and a couple of others where the operators walked out in the same city. The crazy thing is that any closure did not lead to an increase in business for the remaining pubs, my observation was that the pool of people going to the pubs just got progressively smaller each year.

 

We got a nice little mention in the senate inquiry into banking around that time. The new owner of the bank concerned allegedly called in hundreds of pub loans that year as they had a $200M bad debt payback provision in the sale agreement with the vendor.

 

Thanks for sharing your story and learnings.

 

Appreciate your telling your story, @SonOfTrigger - it was no doubt a difficult and stressful period and it's very generous to share your experiences.

 

The only way is up from now and I sincerely wish you all success in your future investment journey. You so deserve it.

 

Yes, thankyou for sharing @SonOfTrigger. Money down the plug hole left right and centre.

I guess the only "positive" I can say is what doesnt kill you makes you stronger...

 

I'm not fundamentally opposed to the industry but if I was going to have a second go I'd be looking at ways to reduce the fixed costs. Pubs rent for extraordinarily high amounts compared to other types of commercial properties (particularly in regional areas). If you can find a space that ticks the boxes you can start from scratch and risk a whole let less, and smaller is where the industry seems to be going - small craft beer venues etc.

I'd perhaps look to build it up and sell quickly to move on before its stale with the public or something that was low investment so it kept it fun and not a financial noose where your whole mood is dependant on how much is in the till from yesterday.

I'd be happy to do something complementary like advising potential small business people on the pitfalls to watch out for but small business people are the least likely to pay for or take outside advice (eg me!). I'd be happy to give away my experience if it saves someone else going through the ringer

 

haha, very true. Although maybe we saved someone a costly lesson via this thread or maybe even in 5 years time someone will google "what could possibly go wrong with owning a pub" and this thread will appear!

 

Thank you so much for this interesting, real and informative thread S of T.
I worked in a couple of pubs and it's pretty hard work. Never-ending.
Was wondering
1. Did the previous owner do any good? You obviously cut back on some of the expenses such as extra staff and wastage. They must've been living on credit.
2. What happened with your parents and parents in laws' mortgages? Did you have to pay them off? Were they ok?
3. Looks like banks are no longer allowed to keep hounding the little guy when there's no way the millions can be repaid.
4. Was always under the impression that food and alcohol does well in a recession /market crash but maybe that's for the supermarket and the bottlo! Sorry to see what the GFC did to your business.

 

Wow what a story thank you so much for posting it, having lost years of savings to my business that went bad when I was 19 years old made me think how amazing it is for you to even be able to talk about it. Props to you for sharing, there are some very valuable lessons to be learnt. The hardest thing for me was to learn to move on, especially when the situation you get yourself into may not necessarily be your own fault, sometimes things just happen.

Again thanks for sharing, great post.

 

Did the banks come after your PPOR and other secured properties? You also mentioned security against your parents place.