Can one use NOI and cap rate to appraise an equestrian center?

[Rickster60]

My daughter has a 61 acre equestrian center in the southeast which has a 20 yr commercial loan with a 10 yr ballon payment due within the next 18 months. She has done a lot to the property to turn it into an equestrian center - building two stall barns and a metal hay barn, building three lit sand and crumb rubber riding arenas, installing miles of wooden fencing, etc.

For market comp purposes, there really aren't any true comps in the area, even if you go back several years.. There are comps for houses on a lot of land, or a house with a small recreational stall barn, but nothing close to what my daughter has - tgey simply don't come on the market in her area and few people want to build from scratch like my daughter did.

An appraiser could add up the value of the land and the 2/2.5 house, plus all of the outbuildings, but from what I've read she may not even get back the construction cost of the buildings and will get no increase in value for the riding arenas and fencing, which was quite expensive.

I have invested in apartment buildings before, and she has a waiting list for both stall and oasture boarders, and her NOI from boarders is a function of the facility and its amenities, so I was wondering - can an equestrian center use the NOI from its boarding operations and a cap rate to determine an aporaised value?

The facility in question nets $200/mo per stall boarder and $100/mo per pasture boarder after all board and other related expenses, excluding PITI. There are 15 stall boarders and 35 pasture boarders for a 61 acre facility, with a waiting list for each type of boarder. There is also a 2/2.5 house on the property used by the owners but if rented would generate another $1000/mo conservatively. There are other income sources such as horse shows, summer camps, training, etc. but just using the annual NOI related to the “doors" yields $84K. In looking at CBRE's 2019 cap rate report North America Cap Rate Survey | H1 2019 there of course isn't a category for equestrian centers, but cap rates for multi-family properties were at 5.37 for all regions, with Tier III metro areas averaging about 5.5%. If we use a cap rate of about 9.5% we get an appraised property value of $884K, which will be higher than the value of the land ($360K) plus house ($225K) plus an 11 stall barn, a 4 stall barn, a new 40′ x 80′ metal hay barn, and three riding arenas.

And of course if we used a 7% rate, it is even higher..

Thoughts? Am I crazy thinking we can treat a stall or pasture slot as a “door" in an investment property? And if this makes sense, what cap rate would be appropriate? Clearly it should be higher than a multi-family investment property, but how much higher?

Thanks in advance for any thoughts..

 

[gregb]

Keep in mind, the NOI is derived by subtracting operating expenses from the projected/actual income.

Net Operating Income Formula
Net operating income (NOI) is simply the annual income generated by an income-producing property after taking into account all income collected from operations, and deducting all expenses incurred from operations. The net operating income formula is as follows:

Net operating income is positive when operating income exceeds gross operating expenses, and negative when operating expenses exceed gross operating income. For the purposes of real estate analysis, NOI can either be based on historical financial statement data, or instead based on forward-looking estimates for future years (also known as a proforma).

Net operating income measures the ability of a property to produce an income stream from operation. Unlike the cash flow before tax (CFBT) figure calculated on a typical real estate proforma, the net operating income figure excludes any financing or tax costs incurred by the owner/investor. In other words, the net operating income is unique to the property, rather than the investor.

 

[Carlos Danger]

A higher cap rate will give you a lower value.

 

[Pittsburgh Pete]

Having no "true comps" complicates the income approach as well. Rents, expenses, and cap rates are a function of the market; can't be pulled out of thin air. Any appraiser might have to expand the search for sales and cap rates to other states.

Cap rate is a function of risk so you'd have to select an investment with similar risk. Also, the income is not "rent" based and is a function of an ongoing enterprise with further complicates the income approach.

 

[George Hatch]

From an income standpoint this operation is similar to a motel. It doesn't work without a heavy dose of management, labor and consumables. All of those expenses have to be extracted from the income before you can get to that portion of the income which is attributable to the realty itself.

I've appraised a bunch of these facilities over the years. They're usually built on land that isn't suitable for regular development, often in a flood hazard zone or a power transmission line easement, and they usually include riding areas which are even less amenable to development. In this region they usually don't sell at pricing that's related to their costs nor to the income. It may be different in your area.

What I would do in this assignment is to research the sales history for all such properties in the region, maybe going back 20 years, to see what the relationships were between the pricing for those properties vs the other land+building combos in their respective areas. If the other equestrian center sales are selling for 1.2x the price of the house+20 next door then that additional 20% was what the additional improvements apparently added to that property's sale price. Rinse and repeat to identify the most common patterns and then import that adjustment factor in for use with the current set of land+improvements comparables. You can look at the income, but in real life (and in my region) a lot of times these operations are more a labor of love than of commerce.

 

[Terrel L. Shields]

Typically, I would think the center won't sell on the basis of the management. The value of the income is a reflection of the business enterprise value (BEV) rather than the value of the real estate. The E centers I know have all sold basically for the value of the land and a huge discount for the functional obsolescence (over-built) nature of the improvements (buildings, corrals, arenas, stalls, apartment, etc..) One nearby stayed on the market for nigh 10 years, only to be hit by a tornado a few months later.

If you seek an SBA loan on the business, perhaps you could get the loan that way. Real estate? Well, if I was appraising it, the land would be X dollars. The cost of the improvements less physical and functional obsolescences would be key. And based upon the last two sales I have (both being within 3 miles of me) the extracted functional obsolescence would approach 50% of the RCN...

 

[Michigan CG]

I have appraised many of these; we call them horse farms here. I have never even thought about an income approach and am friends with some Farm Credit appraisers and they would never consider an income approach. There are too many moving parts and unknowns for the comps and many other reasons that this approach is not viable.

The sales comparison approach with a mix of depreciated cost for the improvements is how they are generally completed in the midwest.

Hint: If the appraiser you want to hire doesn't know what a paddock is find another appriaser.

 

[Terrel L. Shields]

If the appraiser you want to hire doesn't know what a paddock is

if someone uses that term here, we usually think they ride English and came from "up n'oth"... Pen, arena, corral, but rare for anyone here to refer to a paddock....except real estate agents... and they misspell it.

 

[glenn walker]

Full disclosure- I know nothing about horses except when I worked in the Savings & Loan REO department they had loans on properties in Chino and Riverside County other places that had equestrian centers etc.

The Chief appraiser always said our highest risk properties and borrowers were equestrian . I asked why ? He responded with well because they start out with X amount of horses and its a hobby and a labor of love . But it's expensive so they figure they can cover their costs by boarding other peoples horses and next thing you know they have to start building more stalls, more barns, riding arenas, and 10-years later they now have 40 horses. But suddenly the economy slows down and the boarders slowly start to not be able to pay their boarding fees and the owner cannot evict a horse like a tenant . And nobody else wants to purchase an-old horse so you end up feeding it and maintaining it and now you have a net loss on multiple horses, finally you wake up in bankruptcy. But he says horse people especially women are extremely positive and bullish and will lose everything including their husband and first born child to save their equestrian lifestyle. Son remember a horse is like a boat the best day is the day you drop that bad boy in the water and the best day is when you sell it because boats are like horses they eat a lot, one gas and one hay, and they break down, one goes to the mechanic and the other to an-expensive veterinarian and those guys are not cheap because they know people will pay anything to save their favorite horse or dog .

So I asked him do we ever foreclose on equestrian ? He laughs and says we will crawl on our hands and knees and do almost anything to keep an-equestrian center going because the last one we ended up taking back was on about 80 acres, and when the borrower vacated She left us with over 50 horses, and 80 acres of horse plucky land. We had to move the horses bring in a grader to clean up the contaminated soil and then we had to employ a two full time ranch hands. One got the bright idea and decided he could make some-side money by shoeing horses so he gets kicked in the head and ends up in a hospital with brain damage for 3 or 4 weeks, then and he sues us and his attorney claimed we had an-unsafe work environment and our insurance carrier denied the claim and some dirt bag Judge looks at us and says what the hell is a bank doing in the horse business ? This was a bench trial and our City Slicker attorney who knows nothing about horses tries to explain to the judge that we never authorized the ranch hand to run a side business horse-shoeing on our property. The Judge says I don't care and rules in favor of the plaintiff with a judgement of $500,000 and that was in 1985. We appealed it and lost because Judge says the guy has irreparable permanent brain damage. The Chief appraiser says hell our PI followed him 5 miles on horse and the guy is fine. I respond well even a brain damaged guy can ride a horse. The Chief say shut up and listen. Then it took us another 3 or 4 years to find a buyer, but he had little cash so we financed him and my God he gets in trouble a few years later and our board of directors orders me to not even think about foreclosing on him , so we let the guy stay another five years .

So based on my 10 minute course on equestrian properties and loans my assumption is that equestrian centers would be considered to have Unstable Income Streams and additional liability for the lender if they ever had to take it back. So a cost approach on home, barns, out buildings less physical depreciation and comparable land sales used to to value the land.

The good part is maybe the lender will bend over backwards to re-write her loan. I would also consider calling them and telling them that due to Covid-19 and being in a None-essential business we are sinking financially and if there anything like my old Chief appraiser you may just get the surprise of your life because they just may rewrite that loan or extend its balloon by another five or ten years at a lower interest rate. That is also another reason I would consider not doing any more improvements to the property until the loan has been refinanced.

Hopefully your Governor will not require horses and riders to Social Distance by a minimum of 20 feet because a 40 horse business will have to go down to 15 or 20 horses with both riders and horses wearing face masks. All horse shows will have to be done "virtually" and now the income stream has gone from positive to negative and you have to get your old Cat-D-10 out of the barn and turn the big equestrian center into a petting zoo and a pony rides for the kids and maybe even a small theme park.

Good Luck- Cost Approach-Land Sales = Value

 

[Michael S]

I appraised an equestrian center a few years ago. It was used for some large shows and definitely attracted a regional audience. I found several sales of similar facilities in Colorado and a few other nearby states - though I had to go back a couple of years. As I recall the unit of measurement was $/Acre. All that fencing, barns, other buildings just got lumped into the land. The footing (dirt to us non-equestrian types) in some of the arenas cost tens of thousands of dollars and had to be replaced every few years because it is specially formulated to be not too hard and not too soft and not too muddy and not too dusty, etc.

It was an interesting assignment. Had it not been an update to an older report a colleague did a year or two before I probably would have turned it down. Because of that the cost approach was 90% complete, I just had to make a few updates and a sales comparison approach per the client's request. I can't remember how much weight I put on that but I was pleasantly surprised at the amount and quality of data I was able to find - albeit I spent a fair amount of time gathering and confirming it.


Interesting side note, this equestrian center bordered a large area of BLM land that was used for open space. My National Guard infantry unit uses that same open space to go train in (firing blanks only). Not too long after completing that appraisal a group of horse riders and pack of hounds from that equestrian center came past us. They were on a fox hunt. There's not a lot of foxes around here so they were actually on a coyote hunt. As the owner told me, they kept hounds to go "fox" hunting, but the coyotes were too smart and nobody was actually trying to hurt them so they would just play with the hounds and tire them out then lope off into the desert.