fast-food restaurant appraisal

[grant gryseels]

this is my first appraisal of a well-known franchise fast-food restaurant. the land and improvements in the cost approach have a certain value which is much lower than the values indicated by the sales and income approaches . the reason the sales and income approaches indicate such a high value i assume among other reasons, it is because of all of the income (RENT) that is produced by that business. should i just leave the cost approach where it is, or not include it or what? the cost approach indicates a value around $400k to $500k, whereas the other two approaches indicate values of $1million. i dont know what to do

 

[The Warrior Monk]

this is my first appraisal of a well-known franchise fast-food restaurant. the land and improvements in the cost approach have a certain value which is much lower than the values indicated by the sales and income approaches . the reason the sales and income approaches indicate such a high value i assume among other reasons, it is because of all of the income (RENT) that is produced by that business. should i just leave the cost approach where it is, or not include it or what? the cost approach indicates a value around $400k to $500k, whereas the other two approaches indicate values of $1million. i dont know what to do

Only approaches that are necessary to the valuation are required. On what basis do you find the Cost Approach necessary for the valuation of your property?

 

[grant gryseels]

i considered the cost approach credible because it includes what i consider is an accurate estimate of value for the land and for the depreciated value of the improvements. there's something non-physical that im missing here and im not sure how to put a value on it

 

[The Warrior Monk]

How do the buyers for that particular property determine what they pay for the property? Do they base what they pay for the property on what the land is worth and the depreciated value of the improvements?

 

[Mountain Man]

If your market approach and income cap are close, then something is wrong in your cost approach. Whether it be using the wrong rating, wrong valuation page or regional multipliers, or just wrong on the land value, it should not be off that much. Why would the market pay a million when they can build it for 500K?

 

[grant gryseels]

exactly. i think what im missing here in the cost approach is possibly the cost of the franchise, and what that name represents in $$

 

[PL1957]

the reason the sales and income approaches indicate such a high value i assume among other reasons, it is because of all of the income (RENT) that is produced by that business.

Make sure that you are appraising the correct interest - leased fee vs. fee simple. It sounds like you're appraising the leased fee.

 

[Joker]

Sounds like something is wrong.

I have often seen a particular fast food chain with some red head in pigtails that rent for a great deal of money, above market. That might alter the results if you were looking at leased fee instead of fee simple. Make sure you did all three approaches without leaving something out. Were your comparable sales rented at the time of sale?

 

[Restrain]

The total package includes franchise rights, etc. A restaurant with a high dollar franchise (which includes national advertising) will bring a lot more than the same building without the franchise. I've seen the value drop significantly if the franchise moves to a new location, leaving the building behind. You are going to have to extract the value of the business when looking at these things if all you are looking at is the building and land.

 

[Ted Martin]

RStrahan is correct, sounds like you are mixing some going concern value in and getting a "value in use" rather than just the RE.