fast-food restaurant appraisal

[PL1957]

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

If the property has "rent" it most likely has a lease. If it has a lease, it's a leased fee value.

Just because the lease is "above market" doesn't make it a value in use or a going concern. It still remains a leased fee value.

 

[incognito]

Like RStrahan has indicated, you may not have considered a very important portion of the cost approach, goodwill.

Also, you have to understand that these McBurgerland franchises are a unique animal when it comes to buying land. They rarely consider market value when they buy land. I have worked on a few McBurgerland appraisals, and have a close friend who owns 4. When corporate designates a need in a new location, they find a location which will produce the highest revenue. Period. Circumferential access, road exposure, adjacent mall traffic, proximity to major roads, etc. Then they back in to the price they are willing to pay, by estimating revenue, backing out hard costs, which reveals what they are willing to pay for the land. Then they go and buy it, with little concern of what the true market value is. My dad sold a parcel to a Wendy's in Cape Canaveral, FL about 8 years ago. They came to him, and offered him a very high price, oblivious to the fact that is had been offered for sale (but not in MLS) for 33% less! Everyone was very happy.

McBurgerland came in within 6 months and paid TWICE what my dad got, for a similar parcel a block away. Ends up that the Mcburgerland is the highest grossing location in the county, and the Wendy's is #2, so these guys are not dumb, they just go about acquiring land a little differently than most...

The point is, you need some specialized experience if you plan to do a good job on a big name fast food property, because the buyers typically do not buy based on value, but on their estimate of potential revenue and this does effect the true market value.

 

[JT1974]

Is the property subject to an arm's-length lease from John Q. Investor to McBurgerland or is it an owner-occupied property that just happens to be a franchise operation. That is important because if the lease is truly arm's-length, you'll basically be looking for sales of comparable net-leased McBurgerland properties. Not too hard........Walgreen's and Wal-Marts sell all the time "sight unseen" based on capping the rent.

However, if you're appraising an owner-occupied franchise restaurant where the real estate owner also runs the business, you may need to pay closer attention to the existing lease vs. market rent for other similar properties. Also, you may need to segregate a portion of the NOI as "going-concern" business value.

Again, check with the lender and clarify what they want as there can be a huge difference in the value of a property that is net leased to a national credit tenant on a long-term lease and a similar property that is not.

 

[grant gryseels]

thanks for the help everyone, i think i see what the deal is. i have what is known as a going concern value which includes an intangible enhancement of the value of the operating business enterprise. basically i have a value for the real property but also have an intangible property attributed to this particular type of business

 

[Jim Buckner]

When I am dealing with a "going concern" type property where the business income and real estate income are intermingled I often use a bifocated approach. I find it helpful to allocate the net income first to the RE at an appropriate real estate rate of return and then the remainder income is attributed to the business and likely has a higher cap rate due to greater risk and more variables.

 

[grant gryseels]

now my question would be , how do i determine how much is the "going concern value" or "goodwill".....and then what ....do i just add that value to my cost approach to bring it more in line with the other two approaches?

 

[grant gryseels]

i have comparable rents of the same particular restaurant in this area. and they are nearly identical to my subject rent . so should i have rents of other non-franchise restaurants in this area included, and however much is over and above those, consider those the going concern portion?

 

[grant gryseels]

the owner whom i am doing the appraisal for does not own the franchise, or run the business . he strictly owns the building adn the land it sits on. he rents it to the franchise chain

 

[JT1974]

Grant,

Based on what you just said in the above post, it looks like it is a typical net-leased property. In that case there is no going-concern value. I would suggest you research what going-concern business value is. If you have an experienced mentor, ask them. Also, go to the dictionary of real estate appraisal and check out what it says.

I suspect you are not doing your cost approach correctly. Do you have a current copy of the Marshall Valuation Service cost approach book? Are you selecting the correct base costs and applying appropriate adjustments for HVAC, story height and perimeter adjustments, site improvements, sprinklers, current & local multipliers and developer profit?

What you are appraising is the leased fee interest of the real estate. Get comparable sales of similar net-leased fast food restaurants and see what range of cap rates they're selling based on. The income approach is your primary indicator with secondary support from the Sales Comparison Approach. The cost approach may or may not be a reliable indicator due to the age of the building (not sure how old it is). Remember, an appraiser must consider all approaches and develop those which are applicable.

Please keep us informed on what you come up with.

 

[Terrel L. Shields]

On what basis do you find the Cost Approach necessary for the valuation of your property?

If you are being asked to appraise only the land and the improvements, i.e.- the "REAL" property, then the Cost Approach is not lying to you. In fact, I would consider it absolutely necessary to both appraise the property and to determine the real property contribution of comparables. If you find former fast food restaurants which are selling you likely will find they are in unity with the Cost Approach. That's the REAL interest. The sale of an on-going franchise by someone who is passively leasing to a chain will relate to the INCOME and virtually nothing else..or in the most vague way the Cost approach. Those sales generally will be higher than the Cost Approach but a lot lower than the Sales Approach. The owner-operator sale will reflect the entire package value.
The difference between the Cost and Income approaches will reflect the contribution of the Franchise slash income "blue sky" value of the overall property. I hesitate to call franchise income "real property". SO? Is the lender loaning on the real estate ONLY? or, is it a BUSINESS Loan? If it is a Business loan, then the higher number is the BUSINESS value which includes the hard assets (the real estate), the personal property (equipment & stock), and the BEV (Business Enterprise Value). The sale of on-going franchise properties is hard to analyze because such income information is rarely transparent and you really have to be all smiles and dials or know the folks before they are going to break it down for you.
I will appraise some franchise properties, provided its a passive interest, the owner does not own the franchise or the equipment but otherwise, this kind of stuff is best left to a CPA to value an overall business.