Cap rate for a bar

[MNRural]

Unless you have rents of comparable bars, dont bother with an income approach.

SC is the only recongnized approach; the only thing a market participant would consider (unless its new or nearly new).

Be sure to indicate whether you are or are not including FF&E. In a small town bar, that is most of the value anyway. Most of your comp sales will include components including RE, FF&E, inventory, and goodwill. You will have to break this out and reconcile it some way.

 

[Scott Lanz]

Paul mentioned the allocation of the components to value. My experience indicates that buyers and sellers typically negotiate this allocation to their respective tax advantages. This is often completed by accountants and not real property, equipment or business appraisers.

Say you are researching bar sales and you get the entire sale price and the breakout for the real property, FF & E, non-compete clause and my favorite, goodwill or business value.

My question is how do you guys/gals wrap your arms around this allocation?

 

[Wayne Tomlinson]

In the sale of a downtown bar in a small town near me, the bar sold for $180,000. including all FFE.

On the transfer document, the value was placed as $120,000 for the real estate, the balance for the personal property.

In this little town, you can buy a downtown vacant store front for +/- $10,000 per front foot or a little less. The bar is a typle 20' wide building.

In a recent appraisal that I was shown, a brand new Certified General used this sale as a comp for a small storefront property which included a vacant veteranarian's office and a steel frame on about one half acre site. The appraisal was to establish a price to sell the vet's property

I don't know how she came up with the value, but it has been on the nearly two years and the vet still owns it.

Having the Certificate is not everything, you still have to know how to appraise.

Wayne Tomlinson

 

[Wayne Tomlinson]

Woops

I just re-read the above post.

The subject of her appraisal was the vets property as discribed. it was not a storefront.

Sorry

Wayne Tomlinson

 

[SharperImage]

Cap rates for a bar

I'm doing an appraisal of a small bar. It was purchased by another bar owner as really a write off about 1 1/2 year ago. It began to be profitable now she has an offer to purchase. The NOI is really only for one full year. Hardly gives any clear trend. The first 4 months of this year shows a pretty good NOI from previous year.

The problem with bars is developing a market cap rate since they always have cooked books, and no one divulges data. Typically when I do these things I just work off the sales and cost approaches with most weight to the sales approach. However the bank would like me to look at the NOI a bit. I thought about building an investment cap rate but really that depends upon the actual investor or the buyer.

Any suggestions what a person might do with a limited NOI.

Have any of you developed a market cap rate for bars? Or have you found it pretty much an effort in futility like I have?

Doug, I don't mean to be rude, but I did a license look up on you, and according to Wisconsin, you're only a Licensed Appraise, so why do you state you're a Certified Residential?

 

[xm39hnu]

You guys need to lighten up on Mr. Quenzer. I agree with Timothy Evans: Give him the information he asked for, and point out any analysis pitfalls that are liable to trip him up. In short, help him figure out how to develop the appraisal.

I'm a cert res, and I do these small commercial properties all the time. In this small rural area, the SCA is the dominant approach. This is because most buyers purchase commercial buildings to occupy them and to run their own business--which probably isn't the same type that used to be running in the subject. I value only the real estate, and not the BEV.

Am I competent to do every one of them? Of course not. Give me more than one tenant, leases with more than one "net" in the description, expense caps, overage rent, or other complexity and I'm on the phone to a CG hollering "Mayday!" I'm also on the forum asking, "Hey, y'all..."

Now, the reason I ask the forum is to be sure the CG helping me knows what he's doing. Many don't. They rely on that certificate for its BS authority, especially around here. You guys/gals can help me detect the fertilizer component of an appraisal, and to either s--tcan the CG and get another one, or help assure that the appraisal is competently completed. I need supervision for commercial work, but I want to make sure that supervision is competent.

 

[The Warrior Monk]

I think Mr. Quenzer is going to need to go to a bar after reading all these critical replies.:new_all_coholic:

I would be careful stating that the SCA is the only approach. From reading the original post, it appears that there is no lease, in which case SCA is the way to go. If the property has a lease between non-interlocking entities, the Income Approach would have to be considered, especially if rates are not at market levels.

 

[Michigan CG]

I'm doing an appraisal of a small bar. It was purchased by another bar owner as really a write off about 1 1/2 year ago. It began to be profitable now she has an offer to purchase. The NOI is really only for one full year. Hardly gives any clear trend. The first 4 months of this year shows a pretty good NOI from previous year.

The problem with bars is developing a market cap rate since they always have cooked books, and no one divulges data. Typically when I do these things I just work off the sales and cost approaches with most weight to the sales approach. However the bank would like me to look at the NOI a bit. I thought about building an investment cap rate but really that depends upon the actual investor or the buyer.

Any suggestions what a person might do with a limited NOI.

Have any of you developed a market cap rate for bars? Or have you found it pretty much an effort in futility like I have?

Here is the origianl post.

Now from what I highlighted doesn't it apprear, isn't it very clear, that this property is being utilized as a bar and being sold as a bar, and doesn't it jump out that the purchaser intends to continue using it as a bar?

If the banker wants to have more info on the NOI and the poster is clearly talking about an NOI for a bar, then ladies and gentleman we have a business evaluation.

The sales comparison approach is obviously applicable, but depending on the town finding other bar sales might be limited. Yes using other storefront sales will give an indicator to value, most likely the low end of the range. An operating bar has fixtures, plumbing in the places it needs to be to operate a bar, maybe the big long bar itself, you know the one we plop down at after finishing the big complicated appraisal, where we tell lies about how great we are and look for admiration, and maybe hope to get a glimpse of the hot bartender bending over to get beer out of the coolers.

The bar has specialized bar furniture, and other personal property like maybe a pizza oven, or owned pool tables, etc.....ad finitum.

I would venture to guess that 90% of bars sold, are sold to be used as bars in the future. Every Tom, Dick and Jane thinks that they can run a bar, and when one comes up for sale, Tom, Dick and Jane are lined up with their bag of money or in this case, Mr. Bankers bag of money. And Mr, Banker, in this case wants to know more about the income of the place, and the NOI. Why would Mr. Banker care about the NOI if the intended use of the purchaser was to open up a quilt shop? And why would a person who is running a profitable bar sell to someone who doesn't need the plumbing, fixtures, set-up, ad finitum......this would drive the price down to a simple storefront. Mr. Bar owner wants to sell his profitable bar to Tom, Dick or Jane. Tom, Dick or Jane are going to make the bar better, more profitable! They will be the best bar in town, because we all know that any person with two legs and a pulse can operate a bar.

So now, it is very apparent to me we have a business appraisal, and simply comparing other available space that does not have certain aspects in place is not very comparable, but it is a decent place to start.

In my earlier post I discussed how to recreate an operating statement, it isn't that hard to do. And in this case I think it is imperative that an income statement be prepared....the buyer is buying the property on the potential and expected future income stream, and Mr. Banker, the one who wants to know more about the NOI, is obviously lending on the future income stream of the existing bar so he can get his money back!

As for a cap rate, obviously we would want to find other bars that have sold where true income and expense numbers are known....that is like winning the lottery sometimes (winning the lottery ticket you buy in the BAR you sit it on Friday night discussing the cap rate of bars with your wife who looks at you like you are a freak).

We know that McDonald's ground leases are 6.5-7.5%...SO we know the cap rate is higher than 8%. A good place to look for cap rates would be mom and pop restaurants that have sold (because almost every Tom, Dick and Jane also think that they can run a restaurant [restaurants are the 2nd most likely business to fail in the US]) through a broker.....those are not to hard to find...and I am guessing cap rates for small restaurants would hit around 12-15%. Small restaurants sell for higher cap rates than bars because there is more risk, and more personal property.....

So now we have extracted a cap rate that is between 8% and 15%, most likely 8% (more than a McDonald's ground lease) and 12% (the low end of momn and pop restaurants). 8%-12% sounds like 10% to me.

 

[Fred]

I do these small commercial properties all the time. In this small rural area, the SCA is the dominant approach. This is because most buyers purchase commercial buildings to occupy them and to run their own business--which probably isn't the same type that used to be running in the subject. I value only the real estate, and not the BEV.

How do you formulate units of comparison and reconcile to conclusion.

 

[xm39hnu]

How do you formulate units of comparison and reconcile to conclusion.

It's not too difficult around here. Most of these that I'm talking about are pre-engineered metal buildings with some sort of business façade. They're actually more consistent in style and quality than the residences I do, so ranking works well.

Understand that I'm not doing things like truck terminals, where the unit of comparison might be number of docks. The elements of comparison are somewhat similar to residential stuff: GBA, age, site size (even in "town", front footage doesn't work), access, location, interior finish, lighting, heating, cooling -- all of these can be demonstrated to affect selling price to some degree. (I usually have less trouble supporting adjustments with these little tin buildings than I do with some residential problems.)

Reconciliation works the same way as it does with any other appraisal: Explain the differences between the sales, rate'em, rank'em, and reconcile to a value within the supported range.

You're probably going to yell at me, but I use a grid similar to the URAR for quantitative analysis, and support that with a qualitative analysis in the reconciliation.

Reconciling the approaches is the same as it is in any other appraisal, except that there's some income data available on the few leases which exist. Usually doesn't amount to much, though, and the income approach gets little weight. Cost is easy to calculate, and just as irrelevant. (How's a 60 x 80 tin building with brick & glass storefront on 3 acres for $400/mo on a US Highway grab you?)