Allocating Real Estate/FF&E/Business

[jtvaluation]

Hey guys, I'm currently appraising a gas station with convenience store and car wash. I'm running into a situation where my going concern value from the income approach is coming out a lot lower than my cost approach and I have no idea how to allocate the going concern value to the real estate, ff&e, and business. Actually this has happened to me several times. Back in the day, before the downtown, it was the opposite, where the value indications would indicate feasibility to construct a gas station or car wash. It was also easy to just take the cost approach value indication for the real estate and ff&e and allocate the difference between these two and the total going concern value to the business.

Now that my cost approaches are coming out higher than the going concern value, how do i allocate the total going concern value to the various components?

 

[PropertyEconomics]

You can allocate FF&E based on their depreciated cost basis ... I believe your analysis is showing you the property is not feasible to construct therefore there is no value attributable to the business. The value of the going concern is the value indicated by the income approach which is lower than that of the cost analysis.

Do you have any market sales to support your conclusions?

 

[Vernon Martin]

If you're trying to determine real estate value, you could look at sales of vacant gas stations/C-stores, particularly if they were acquired with the same uses in mind.

 

[jtvaluation]

Okay I can see how the FF&E value is allocated. I want to be sure I understand this right and use some hypothetical values. Say i have a cost approach figure of 2,000,000, which consists of a land value of 1,000,000 depreciated real estate of 800,000, and ff&e of 200,000. My total going concern value via the income approach is 1,500,000. So to break this 1.5M up to real estate, ff&e and business, are you inferring the following?: Real Estate- 1.3M, FF&E- 200,000, and Business- $0?


And yes, I have several sales of comparable gas station sites, which were purchased for land value or near land value.

 

[PropertyEconomics]

Okay I can see how the FF&E value is allocated. I want to be sure I understand this right and use some hypothetical values. Say i have a cost approach figure of 2,000,000, which consists of a land value of 1,000,000 depreciated real estate of 800,000, and ff&e of 200,000. My total going concern value via the income approach is 1,500,000. So to break this 1.5M up to real estate, ff&e and business, are you inferring the following?: Real Estate- 1.3M, FF&E- 200,000, and Business- $0?


And yes, I have several sales of comparable gas station sites, which were purchased for land value or near land value.

I believe you are correct in your math. There truly is not another way to calculate value of FF&E unless you have market sales in which the value of the real estate and the FF&E were allocated separately ... not something I have not seen very often.
The comparables you have I am guessing are not overly comparable to the subject, however, it is interesting to note based on your analysis, Land is $1,000,000, Improvements are $300,000 and FF&E are $200,000 ... its pretty easy to see why the project is not feasible ... the Impvts and FF&E have depreciated 50% (Cost of $1,000,000 vs Contribution of $500,000).

Vernon also makes a good point in that there is potential that the improvements and FF&E have no value ... if that is what your market sales are indicating ... the question would be were they sales of vacant properties (real estate only) or sales of going concerns (FF&E and any business).

Now you have some thinking to do.

 

[Phil McDonald]

Another Option

While it is common practice to subtract the depreciated cost of the FF&E this method can understate the value of the FF&E. A buyer considering two properties with a going concern that includes FF&E will typically apply a higher discount (replacement cost new) to the property without FF&E. While it is even more difficult to quantify the value of the business, there are currently a significant number of foreclosed properties that have gone dark and depending upon the type of business, going dark can have a very significant impact on value as is the case with hotels.
I think an instructor in a course I took years ago referred to any method that involved using one approach to value in the development of another approach as cross contamination. I always like to arrive at the value conclusion within the single approach. Utilizing the Cost Approach to reach a determination as to the value of FF&E and the going concern in the Income Approach provides a logical framework, but may not be reflective of the market.
I would take a different approach and search high and low inside and outside of the market area to locate as many convenience store / gas station sales that involved the sale of the business only. Business Valuation Resources has databases that will include these types of transactions as well as bizbuysell etc.. With a sufficient number of business sales with leased real estate it would be possible to reach a value determination of the going concern which includes the FF&E. Even if you only locate a handful of these transactions nationwide, it should provide sufficient data to capitalize the business income into a value. This may not be possible with some property types such as self service car washes and to some degree hotels. However, I seem to recall running across convenience stores and gas stations which just involved the sale of the business. In fact, a quick look at bizbuysale showed 500 active listings nationwide and a review of the first page (20 listings) had five that did not include real estate. Of course, locating sales of properties that were leased at the time of sale accomplishes the same thing.
Good luck!

 

[Stephen J. Vertin MAI]

You can allocate FF&E based on their depreciated cost basis ... I believe your analysis is showing you the property is not feasible to construct therefore there is no value attributable to the business.

I would agree. Thank you

 

[Terrel L. Shields]

Gee. You guys are good. This is the kind of stuff the forum ought to do more often.

 

[MNRural]

If you read the AI book on C stores and gas stations, the writer, specialized in the industry, maintains that there is no business or going concern value to these properties, unless they are huge, national chains.