Elements of Comparison - Non-Realty Components

[tsiegel]

I was studying my Appraisal of Real Estate 13th edition and realized that I have been doing something that has been recommended against. I can't quite wrap my mind around it and I thought someone here could explain it better than the book.

My issue is with the Non-Realty Components of Value. The book says to adjust for this in its own category which is a sub-category of Property Adjustments. The book recommends to adjust for this last in the sequence of adjustments. This does not make sense to me. I have always adjusted for non-realty components under Property Rights. In my mind, this is a Transactional Adjustment and I want to have adjusted for this before I begin to make my property adjustments. There is not adequate explanation of this order in the book, as far as I am concerned. Or maybe I am just stubborn.

Could someone explain where I have this wrong?

 

[Terrel L. Shields]

Non-Realty Components of Value

Tangibles
Personal Property
F F & E
_________
Intangibles
Good will, contracts, trademarks, etc.
Business Enterprise Value

If you adjust on a dollar basis, I don't think it matters. If you adjust on a sequential basis...then it matters. I simply segregate out the non-realty from the actual transaction value first personally. OTOH, to analyze a sale, you estimate the rest then what is residual is the non-realty items.

 

[tsiegel]

If you adjust on a dollar basis, I don't think it matters. If you adjust on a sequential basis...then it matters.

I find that I am adjusting on a percentage basis the majority of the time. This would mean that my location adjustment is applied to the unit price which includes the non-realty items. This does not seem right.

I simply segregate out the non-realty from the actual transaction value first personally.

This is effectively what I do when I make the adjustment in the transactional adjustment category. I don't understand why anyone would want the consideration for non-realty items to stay in the unit price while you are adjusting for property characteristics.

I guess I am still confused on this...

 

[Meandering]

I don't think you are confused, and actually bring up a good point.

T, is correct in that the methodology teaches that as a percentage adjustment it's after location.

But maybe it's time to challenge some of what's been taught, or text booked. What do famous appraisal authors say on the issue.


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[Meandering]

But maybe not.

When thinking about restaurants or stores, some of the reason for the existence is tied to location. In that, in a great location, those entities would be expected to have more FFE then similar enterprises in much less desirable locations, so when any new buyer will consider that the optimal FFE for the location is going to translate in the per unit basis of comparison for Rights, Financing, Conditions of Sale, Market Conditions and finally location, so because all would supposedly need a similar amount of FFE, it would be appropriate to deduct as a smaller percentage after your mandatory adjustments.

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[tsiegel]

But maybe not.

When thinking about restaurants or stores, some of the reason for the existence is tied to location. In that, in a great location, those entities would be expected to have more FFE then similar enterprises in much less desirable locations, so when any new buyer will consider that the optimal FFE for the location is going to translate in the per unit basis of comparison for Rights, Financing, Conditions of Sale, Market Conditions and finally location, so because all would supposedly need a similar amount of FFE, it would be appropriate to deduct as a smaller percentage after your mandatory adjustments.

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I am not sure I agree with this entirely. I think this would only be true in specific cases. However, just running with that logic... Why would you want to make a building condition adjustment to a unit price that contained non-realty items? or any other property adjustment, for that matter?

 

[Michael S]

With restaurant sales for example I've always subtracted any FF&E or intangibles (liquor license) right off the top before I make any adjustments. If a restaurant sold for $1.5 million but $300,000 was allocated to the liquor license then I treat it as if the real estate sold for $1,200,000 and I make any adjustments for market conditions, condition, location, etc. from that.

 

[tsiegel]

With restaurant sales for example I've always subtracted any FF&E or intangibles (liquor license) right off the top before I make any adjustments. If a restaurant sold for $1.5 million but $300,000 was allocated to the liquor license then I treat it as if the real estate sold for $1,200,000 and I make any adjustments for market conditions, condition, location, etc. from that.

Agreed. This is how I do it too. I make my real property rights adjustment first and then the rest of my adjustments are made to the resulting unit price.

 

[CANative]

What about when intangibles represent highest and best use?

 

[Meandering]

Can is thinking like me.

it's a highest and best use issue, and also an issue with a going concern.

If the real estate was vacant, you would not have the FFE. So, what were you asked to value? The real estate alone? Or the real estate as is, with a going concern.


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