C Store / Retail Fuel Property

[MNRural]

Anyone have an opinion on the income approach development from the Convenience Stores and Retail Fuel Properties Book by Robert Bainbridge of the Appraisal Institute?

The theory is to remove the income attributed to the equipment (based on an unsupportable % return from the cost of the equipment), and the business profit (they dont explain any way to get support for this) from the income statements. What is left, less taxes, building insurance, replacement reserve is the income attributable to the real estate only. It seems hardly supportable to me, based on the limited information that is available in the market.

Also, any thoughts on what type of value you are offering here? I noticed some of my sales allocated goodwill and business value, but most did not. Is this really a going concern value that cant be separated from the real estate value?

Opinions please

 

[Vernon Martin]

Elegant but impractical

Anyone have an opinion on the income approach development from the Convenience Stores and Retail Fuel Properties Book by Robert Bainbridge of the Appraisal Institute?

The theory is to remove the income attributed to the equipment (based on an unsupportable % return from the cost of the equipment), and the business profit (they dont explain any way to get support for this) from the income statements. What is left, less taxes, building insurance, replacement reserve is the income attributable to the real estate only. It seems hardly supportable to me, based on the limited information that is available in the market.

Also, any thoughts on what type of value you are offering here? I noticed some of my sales allocated goodwill and business value, but most did not. Is this really a going concern value that cant be separated from the real estate value?

Opinions please

I agree that what he says is easier said than done and seems very academic.

When I do an income approach, I treat the gas station/C store as a rental property, even if it isn't. In other words, I estimate a market rent and then use cap rates from sales of rented C-store/gas stations to indicate a value. The market rent is typically a function of achievable sales, like 2 to 2.5%. (Remember that these types of properties are low margin operations, with profit margins generally below 5%.)

VM

 

[PL1957]

Anyone have an opinion on the income approach development from the Convenience Stores and Retail Fuel Properties Book by Robert Bainbridge of the Appraisal Institute?

The theory is to remove the income attributed to the equipment (based on an unsupportable % return from the cost of the equipment), and the business profit (they dont explain any way to get support for this) from the income statements. What is left, less taxes, building insurance, replacement reserve is the income attributable to the real estate only. It seems hardly supportable to me, based on the limited information that is available in the market.

I actually think the way he allocates the values provides a really good check. The rates should line up in order of risk, with the RE having the lowest rate and the BV having the highest. RE rates are relatively easy to find and rates on businesses by themselves are also readily found.

Also, any thoughts on what type of value you are offering here? I noticed some of my sales allocated goodwill and business value, but most did not. Is this really a going concern value that cant be separated from the real estate value?

Opinions please

IMO, the value provided is a going concern (TAB). I don't remember what Bainbridge calls it. C-stores and other retail fuel properties really demand a high degree of comp verification because they can have so many different levels.

 

[PL1957]

I agree that what he says is easier said than done and seems very academic.

When I do an income approach, I treat the gas station/C store as a rental property, even if it isn't. In other words, I estimate a market rent and then use cap rates from sales of rented C-store/gas stations to indicate a value. The market rent is typically a function of achievable sales, like 2 to 2.5%. (Remember that these types of properties are low margin operations, with profit margins generally below 5%.)

VM

How do you treat the equipment and intangibles? Many of the c-store leases that I have seen include not only the equipment, but also some type of supply contract, often with rebates.

 

[Joker]

As always, it depends. There are parts of the book that I concur with and others that may work only in Utopia. There are cases where the equipment can easily be differentiated from the real estate and others where it is nothing more than a SWAG.

Personally, I am a firm believer in replicating the market activity and demonstrating how the market "behaves." I that I have a great deal of market data. I have leases of retail fuel properties both with and without equipment included in the leases. I have sales where the real estate was all that sold (no equipment) and sales of going concerns. In general, the market reacts based upon the income of the property (and/or business) and the sales prices are always a factor of gallons of fuel sold and dollar volume of inside store sales. There are other factors that weigh on the mind of the buyers but that is ultimately what drives them. Some can abstract equipment value but it is almost always for taxation purposes only. Additionally, this can be a factor of negotiation.

Further, you need to define "equipment." Some consider the retail fuel related components to be real property. Others consider it to be equipment.

My answer to your definition of "type of value" is:--
It depends on your scope of work and what is to be valued. It can be a going concern, it can be real estate only, equipment only, or real estate and equipment. So discuss it with the client and determine the appropriate course of action.

 

[Scott Lanz]

There are generally two different types of stores, chains and private ownership. It seems that data on parsing the components of value becomes more prevalent in chains than the smaller operator. Most of the sales in my market are private sales. My research indicates these buyers rarely allocate for buying decisions and purchase on the cash flows from the business.

Many of the sales I look at have financials that incorporate personal expenditures and are very difficult to analyze if the owner's have not kept track of these expenses.

In regards to Mr. Bainbridges methodology, I agree with the other posters. Sometimes there is a disconnect between the ideal procedure and what is occurring in the market, or what data is available to analyze.

Scott J. Lanz