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  #1  
Old 07-30-2010, 06:40 PM
jimmyfrank jimmyfrank is offline
 
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Default "C" store

Appraising a 24 year old "mom and pop" "C" store. Client, buyer or seller unable to supply 2 year operating statement. Data is scarce in rurual town, however some rental data and few sales in the general area. Should I attempt the Income approach without operating statement? Should i decline assignment due to absence of adequate data. Tks
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  #2  
Old 07-30-2010, 06:50 PM
Vernon Martin's Avatar
Vernon Martin Vernon Martin is offline
 
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Surely they pay income taxes. If they can't supply a tax statement, like a 1040 Schedule C, then something sounds fishy. Of course, if the buyer has other plans for the property, such as redevelopment, then the operating history might be a moot point. It would still help in the HBU analysis, though.
  #3  
Old 07-31-2010, 04:53 AM
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Scott Lanz Scott Lanz is offline
 
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I have done a number of these properties in my career. The applicability of the income approach seems light. The typical users of these properties are owners and not investors and this segment has some advantages with income/expenses that an investor does not have.

Since I am in a smaller market, many of these properties I have tracked, and appraised numerous times, for the last 15 years. There appears to be cycle where they are purchased, operated for a few years and then come back on the market at a higher price. This continues until they fall flat, get taken back by the bank and sold at much lower levels and probably more appropriate pricing.

It's odd that they don't have cash flows and I don't think this precludes you from appraising the property. What if it was vacant, how would it be appraised then?

If you are to assign a lease rate, it's nice to see that cash flows from the operation being able to support that number. If the cash flows don't support a typical lease rate it could be bad management and/or accounting, or there just isn't enough business.

Conversely, I have seen some properties that are giant cash cows as they may be the only game in town or have a unique niche. This wouldn't automatically warrant a huge lease payment justification.

The c-store buyers I find very similar to restaurant buyers in their belief that their personality and ideas can make a positively cash flowing enterprise, even if the last three owners couldn't.

Tricky properties.
  #4  
Old 07-31-2010, 08:38 AM
PL1957 PL1957 is offline
 
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Quote:
Originally Posted by Scott Lanz View Post
Tricky properties.
IMO, the only way to appraise a c-store is as a going concern.
  #5  
Old 07-31-2010, 07:12 PM
jimmyfrank jimmyfrank is offline
 
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Originally Posted by PL1957 View Post
IMO, the only way to appraise a c-store is as a going concern.
Thanks, all for your help. I agree that a going concern is the best way to appraise a c-store. However, I do not have data...especially that operating statement for the s/p. Intended use is: Mortgage loan collateral, Intended user(s) Bank and 2 Federal agencies. Just notified client...Unable to complete this assignment unless and unill I am furnished adequate operating statement for s/p. I'll see if they want the job done!
  #6  
Old 08-01-2010, 06:43 AM
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Scott Lanz Scott Lanz is offline
 
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I am posting this as a sincere discussion as I respect the opinions of my fellow colleagues that post in this forum and am truly looking to learn.

When you guys use this approach, are you following the outline presented by Robert E. Bainbridge, MAI, SRA in his publication of: Convenience Stores and Retail Fuel Properties: Essential Appraisal Issues? If so, are you modifying this approach in any way? I have read his book, but haven't taken the seminar by the AI.

The reason I ask is there seems to be a tremendous amount of subjectivity in the income approach analysis presented in this text that references the AI's old 800 course. I took this course and there were some real disagreements in the methodology from many of the participants, including one judge from the neighboring state. Near the end of the class, she said something to the effect that "this wouldn't fly in her court". This wasn't pertaining to C-stores, but hotels. Just as an aside, I am not questioning the abilities of the developers of this course as their collective achievements are exceptional.

If the going-concern method is used, and the intended use is for financing, an allocation of the TAB is most likely required into the tangible and intangible components. Then, an allocation of the tangible property (real and personal) should be completed. Ultimately, some of the residual income needs to be attributed to the real property.

IMO, This residual income allocation to the real property would be the lease rate and needs to be tested against some measure of retail leasing rates in the area. In tracking the sales in my market through the life-cycle I mentioned earlier, the resulting sales price after the subject fails is generally in-line with a current market retail lease and cap rate(s).

The going-concern value would include the intangibles, ie.: cash, workforce, contracts and profit. You stated that you have sales, some rental info and a buyer and a seller. Is the data you have consistent with a going-concern methodology? Can you take the sales you have and back into a range of lease rates using the allocation of the real property and local market cap rates?

I envision a 24 year old c-store in a rural market as a generic retail building that happens to have pumps outside. Generally, buyers in this class are purchasing a “job” and not so much a business enterprise.

After re-reading your post with a buyer and seller (missed that the first time, not sure how, but I did) I agree that you should have the cash flows in regards to due diligence. I don’t think it’s absolutely required to provide a value because it doesn’t address the question I posed earlier.

How would the income approach be completed if the building was vacant and your H&BU is for a c-store? Would you decline and state that the property has to be cash flowing in order for the real property value to be derived because the going-concern method is the only way to appraise a c-store? Or, would you re-construct a going-concern cash flow statement of a proposed business so you can complete the real property valuation?

I am retracting my earlier statement about the weight of the income approach.
  #7  
Old 08-01-2010, 08:34 AM
Terrel L. Shields's Avatar
Terrel L. Shields Terrel L. Shields is offline
 
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Quote:
I envision a 24 year old c-store in a rural market as a generic retail building that happens to have pumps outside. Generally, buyers in this class are purchasing a “job” and not so much a business enterprise.
Yep, buying a job... do you use "rental" income as a proxy for the real property interest? Is it superior to using the owner-operator statement? What issues are there regarding HBU? Most banks want the value of the enterprise, not just the real estate. If so, then using rental data provides you a real property value but does it value the stock and the ongoing concern? Probably not. And if you use the owner-operator, you have the conundrum of it varying with the management of the enterprise.
After a while, I decided that the minimum value was the value of the land...at its highest and best use. The maximum value could be the owner operator unless they were incompetent. "Sales" seems to be weak in that many are sales of desperation (we've lost our hieinie, let's get out or Pop died and Mom ain't gonna run it by herself) So Sales are Weak. Income is Weak....do you fall back on the Cost Approach??? Boy, now I remember why I run from C stores.
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  #8  
Old 08-01-2010, 10:34 AM
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Vernon Martin Vernon Martin is offline
 
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Default Appraisal of C-store for lender

You didn't mention who your client is. Is it a lender?

My main clients are private lenders and they are only interested in real estate value. For them, the only purpose of the appraisal assignment is to determine what the store would be worth after loan default, and the enterprise value will have evaporated by then.

I know some banks still lend on "going concern" value. Those are the banks that needed bailouts and TARP money.

I have the Bainbridge book and find it useful, but it is more focused on going concern value, which is more relevant to purchasers of such properties than to collateral-based lenders.

If you are appraising for a lender the acid test is what the property would sell for if it was vacant.

Regardless, I think the operating statements are essential for judging feasibility of continued C-store/fuel station use. The revenues are more a function of location than the skill of the operator.
  #9  
Old 08-01-2010, 02:56 PM
jimmyfrank jimmyfrank is offline
 
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Quote:
Originally Posted by Vernon Martin View Post
You didn't mention who your client is. Is it a lender?

My main clients are private lenders and they are only interested in real estate value. For them, the only purpose of the appraisal assignment is to determine what the store would be worth after loan default, and the enterprise value will have evaporated by then.

I know some banks still lend on "going concern" value. Those are the banks that needed bailouts and TARP money.

I have the Bainbridge book and find it useful, but it is more focused on going concern value, which is more relevant to purchasers of such properties than to collateral-based lenders.

If you are appraising for a lender the acid test is what the property would sell for if it was vacant.

Regardless, I think the operating statements are essential for judging feasibility of continued C-store/fuel station use. The revenues are more a function of location than the skill of the operator.
Gosh, y'all have given me a lot to think about. I took the A I coursre(on line) about 3 months ago in order to meet the compentency provision after accepting 7 c-store assignments in other parts of State. It is the best thing I did for appraising this type facility. I strongly recomend it to any appraiser doing this type property. Following are some answers to your questions: 1) Lender is local bank with S B A as guarantor, R L F as second lein holder. So I have 3 intended users. 2) Mom and pop store purchased by Oil jobber who ownes 7 in and around my Town( population 4500).
Another twist: This town voted legal sales of alcholic beverages after being "dry" for 250 years. Seems this has caused some activity in this type business..gas and beer! My research in other towns indicate this will increase net annual revenue by 12%. Do I consider that fact in my final value conclusion? Interesting job...I appreciate your help!
  #10  
Old 08-01-2010, 08:20 PM
Terrel L. Shields's Avatar
Terrel L. Shields Terrel L. Shields is offline
 
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Yep, beer sales can be a large part of the biz... and gross has to be considered. In our area, there was a fellow who built stores, run them until he got gasoline sales to 6000 gal. and then the Jobber (Phillips) would find him a Lease/purchase agreement. They paid him $5000 a month plus a percent and after 5 years, bought the business. I guess you could do a DCF on that to find a NPV that would reflect the total property value. This guy was so successful at pumping sales, Phillips would subsidize his land purchases if he bought in towns they wanted to expand to.
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