Appraising An Owner Operated Car Wash And Laundromat (real Estate Only)

[Value in the 850]

So, I've been asked to appraise a 5-bay car wash with 3 S/S bays and 2 Automated Roll-Over Bays. Behind the car wash building is a 2,600 sf building that is used as a laundromat. I've appraised several car washes, and I typically only use the cost approach and sales comparison approach, as I've never come across a car wash that was rented. The property was appraised in 2011 and whoever did the appraisal, used the actual business income from the car wash and laundromat as "rent". In doing this, the value was substantially inflated.

In my opinion, although both properties are currently operating, as a real estate appraiser, I'm valuing only the real estate, not the business. I'm looking for opinions and/or suggestions on valuing this property. The way I want to go about it, is research market rents for the laundromat based on similar buildings that could be used as a laundromat, and apply the "rent" to the laundromat in the income approach.

 

[Michael S]

What is the highest and best use? Is it most likely to be purchased by another owner operator who would continue to run both businesses as a single economic entity? If so they will be purchasing an operating business and therefore the real estate will only be a portion, albeit probably the majority. In order to provide credible results you will likely need to determine the value as a going concern based on the income generated by the businesses and then allocate that between the real estate, FF&E, and any business value/intangible value. It is entirely possible that the FF&E is depreciated to the point where it's only worth a small amount and there is little or no business value. However, if you try to look solely at the real estate and ignore the business you could end up undervaluing the property whereas the last appraiser might have overvalued it. Ultimately the highest and best use might be to clear the improvements and sell the land. Those little freestanding car washes seem to be going the way of the dinosaur around here with new express tunnel car washes being built instead that might costs $5-6 and get the job done in a few minutes.

I appraised a proposed car wash a couple of years ago (express tunnel type) and at that time I utilized a gross income multiplier of 3.25 to 3.50. I'm not sure what sort of multiplier you would get for a Laundromat and how much synergy there is between those two businesses. I have seen a few similar properties where there was a car wash and self-storage. A prospective buyer might demand a discount for purchasing two distinct businesses/two different types of property.

 

[Value in the 850]

Thanks for the reply Michael. The car wash equipment is in good, working condition, and the property is located in a small rural town, where currently it is the only operating car wash. Here is my concern as a real estate appraiser. The appraisal is for the bank, and is for mortgage loan purposes. The highest and best use is the continued operation of the property as a car wash and a laundromat. Here is my concern. A car wash is a special use property and the "income" generated from the car wash is really business income and not property income (rent). I feel that if you attempt to value the car wash in the income approach using the business income, that will result in a value that is not a true indication of the property value. If the bank makes a loan based on the appraised value, which is based on the business income, what happens if the bank ends up with the property? The bank can't operate the car wash. To me, the big confusion is the identification of the income. For example, an apartment building collects rent, which is directly attributed to the real estate. But you can't find car washes that are "rented" as I'd say almost all are owner operated. So the "income" that a car wash produces is based on the business. In other words, we don't value a big box retail building based on the income of the business using the building, we value it based on market rents. My subject property is showing to be profitable and it is the highest and best use. I'm thinking the best thing to do is to clearly communicate that this is the value of the real estate only, (including the equipment for car wash and laundromat), but not the "going concern" value of the business. I would think that should be valued by a CPA.

 

[Gobears81]

Car washes typically sell as going concerns. Do you think that a buyer will not examine the prior performance before purchasing? Car wash brokers cite gross sales and EBITDA multipliers/ cap rates on how these properties sell. I have heard of some car washes that sold based on leased fee interests, but without knowing your market, I'm guessing that's not the best route and the rents that you extract might not be market oriented anyways. The income approach is a vital method of valuing these properties.

 

[Howard Klahr]

I typically only use the cost approach and sales comparison approach,

And are those sale comps of operating car wash facilities? So how is it that you extract the portion of the price allocated to the going concern in those transactions?

If the bank makes a loan based on the appraised value, which is based on the business income, what happens if the bank ends up with the property? The bank can't operate the car wash.

Banks make business loans all the time. Do you really think that this is their first rodeo? What needs to happen is to allocate the components in the going concern valuation into 1) real estate 2) FF&E and 3) business value as has already been noted in this thread.

The bank is loaning on the entire value (operation) of the property, it is just how the proceeds are handled in identifying the loan security is what matters.

 

[Value in the 850]

And are those sale comps of operating car wash facilities? So how is it that you extract the portion of the price allocated to the going concern in those transactions?


Banks make business loans all the time. Do you really think that this is their first rodeo? What needs to happen is to allocate the components in the going concern valuation into 1) real estate 2) FF&E and 3) business value as has already been noted in this thread.

The bank is loaning on the entire value (operation) of the property, it is just how the proceeds are handled in identifying the loan security is what matters.

I appreciate the responses and they provide some interesting things to think about. But.....here is my main concern, and hopefully I can explain it here and let me know what you think.

As a real estate appraiser, do you include the value of the going concern when you appraise a property. Let's just think about this in theory. All things equal, and let's say HBU is current use, subject property is doing well and all that stuff. If you were to appraise a retail building that is owner operated. Maybe it's a small engine repair shop for fixing and selling lawnmowers, etc. So, your subject property has no rental income history. You will go out in your market and find similar buildings and find out what they are renting for, and apply that to your subject building, correct? You don't apply the annual income of the business to use as "rent" in the income approach do you? So why would you do that with a car wash? To me, and maybe I'm wrong, we should be appraising the REAL PROPERTY, and if the car wash is operating and your comps are all operating car washes then the equipment should be considered property and included in the overall value. While a car wash is a unique property, we are property appraisers, not business appraisers. The bank can take the tax returns and ALONG with the appraisal figure out how much to loan. The bank must have collateral to make the loan, and the "going concern" isn't something the bank will ever have if the loan goes bad. Again, I do appreciate the feedback, just trying to add to the thought process and conversation.

 

[Michael S]

Thanks for the reply Michael. The car wash equipment is in good, working condition, and the property is located in a small rural town, where currently it is the only operating car wash. Here is my concern as a real estate appraiser. The appraisal is for the bank, and is for mortgage loan purposes. The highest and best use is the continued operation of the property as a car wash and a laundromat. Here is my concern. A car wash is a special use property and the "income" generated from the car wash is really business income and not property income (rent). I feel that if you attempt to value the car wash in the income approach using the business income, that will result in a value that is not a true indication of the property value. If the bank makes a loan based on the appraised value, which is based on the business income, what happens if the bank ends up with the property? The bank can't operate the car wash. To me, the big confusion is the identification of the income. For example, an apartment building collects rent, which is directly attributed to the real estate. But you can't find car washes that are "rented" as I'd say almost all are owner operated. So the "income" that a car wash produces is based on the business. In other words, we don't value a big box retail building based on the income of the business using the building, we value it based on market rents. My subject property is showing to be profitable and it is the highest and best use. I'm thinking the best thing to do is to clearly communicate that this is the value of the real estate only, (including the equipment for car wash and laundromat), but not the "going concern" value of the business. I would think that should be valued by a CPA.

I've found that most lenders want to see the going concern value and the breakout of real estate, personal property (i.e. FF&E) and business value. They will likely not lend against the business value but the moment a property like that stops operating it almost becomes a distressed sale.

 

[Howard Klahr]

if the car wash is operating and your comps are all operating car washes then the equipment should be considered property and included in the overall value.

USPAP requires the separation of Real Estate, FF&E and Business value, so if you are not doing that you have other issues to consider.

the "going concern" isn't something the bank will ever have if the loan goes bad.

Have you appraised any gas stations, convenience stores, hotels, motels etc? All of these property types comprise real estate, FF&E and Business value.

I've found that most lenders want to see the going concern value and the breakout of real estate, personal property (i.e. FF&E) and business value.

So the fact that it is a USPAP requirement does factor into the issue?

They will likely not lend against the business value

Financial institutions lend against business value all the time.

 

[Gobears81]

I appreciate the responses and they provide some interesting things to think about. But.....here is my main concern, and hopefully I can explain it here and let me know what you think.

As a real estate appraiser, do you include the value of the going concern when you appraise a property. Let's just think about this in theory. All things equal, and let's say HBU is current use, subject property is doing well and all that stuff. If you were to appraise a retail building that is owner operated. Maybe it's a small engine repair shop for fixing and selling lawnmowers, etc. So, your subject property has no rental income history. You will go out in your market and find similar buildings and find out what they are renting for, and apply that to your subject building, correct? You don't apply the annual income of the business to use as "rent" in the income approach do you? So why would you do that with a car wash? To me, and maybe I'm wrong, we should be appraising the REAL PROPERTY, and if the car wash is operating and your comps are all operating car washes then the equipment should be considered property and included in the overall value. While a car wash is a unique property, we are property appraisers, not business appraisers. The bank can take the tax returns and ALONG with the appraisal figure out how much to loan. The bank must have collateral to make the loan, and the "going concern" isn't something the bank will ever have if the loan goes bad. Again, I do appreciate the feedback, just trying to add to the thought process and conversation.

Let's take an office building. If there is a financial adviser in there before, we don't care how he does because it might sell to an insurance company or maybe a real estate appraiser wants to move up from their current accommodations. Same thing with many owner occupied retail and warehouse properties. Just as a hotel and gas station sell for their specific uses (and those prospective purchasers do examine their prior performance), car washes typically sell for car washes. An exception would be highest and best use suggesting an alternative use, such as it being a shell for another building type or simply redevelopment. That is actually an issue and I spoke with a car wash broker recently that said so many of these self-service properties are just being purchased for redevelopment. But provided no mismanagement in the past, an examination of the historical performance would provide direction in the highest and best use analysis. Also, examination of their performance may indicate a different value than what the other comparable sales would imply based on a consideration of age, quality, etc. You mentioned appraising these properties too high based on intangibles-that isn't the issue here because if there is business value present, that would be dealt with, but those are the same issues affecting your comparable sales also.

 

[Terrel L. Shields]

if you try to look solely at the real estate and ignore the business you could end up undervaluing the property whereas the last appraiser might have overvalued it.

Spot on.

The appraisal is for the bank, and is for mortgage loan purposes. The highest and best use is the continued operation of the property as a car wash and a laundromat. Here is my concern. A car wash is a special use property and the "income" generated from the car wash is really business income

Ask the lender, as they may want the total business value not just RE.

As a real estate appraiser, do you include the value of the going concern when you appraise a property.

Almost always