Fast Food Restaurant - Going Concern Or No?

[NeedToKnow2017]

I'm appraising an owner occupied fast food restaurant with a national brand name. It was built approximately 10 years ago and I know how much the owner has in it. The "as proposed" appraisal (done by a different firm) that was completed at the beginning of the project came in right around the construction cost. The problem I'm having is the owner indicated that there is no way he would ever sell it for that amount today, and he has the financials to back it up. So I guess my question is, do I use the store sales for the income approach (which would come in significantly higher than the cost approach) and value it has a going concern with the difference between the cost approach and income approach attributed to the "business enterprise" value? Or do I forget about the store sales, use comparable leases to establish a market rent, and just value it based on the income that the real estate is capable of producing?

P.S. - Don't these properties sale as going concerns? If so, shouldn't they be appraised as such?

 

[glenn walker]

Unless you are appraising both the property and the business it sounds like you did it correctly. Most fast food or restaurant chains own the structure and lease it to the owner * In your situation the owner could sell the business and retain ownership in the property which most likely is what he will do in the future because it's difficult to find existing structures all set up and ready to go. ( so he would only be selling the business ) BUT if he did elect to sell both the property and the business most buyers would value the property and business separately. BUT I could be wrong

 

[NachoPerito]

Restaurant revenue shouldn't be a big factor in your analysis except when looking at market rental rates. You can compare rental rates in the area with your own calculation wiith what the restaurant owner could afford. For example, if owners usually pay 8% in gross revenue for rent then you can calculate what the rent would be for you and compare it to market rent in the area to see if the restaurant could afford to pay that rent. Don't use the gross revenue of the business and pretend that is market rent for the real estate though, no bueno.

 

[NeedToKnow2017]

Think I'll just value the real estate based on comparable leases and make it clear in the report that only the real estate is being valued. Thanks for the replies!

 

[hastalavista]

Think I'll just value the real estate based on comparable leases and make it clear in the report that only the real estate is being valued. Thanks for the replies!

What's the intended use of the assignment?

 

[NeedToKnow2017]

What's the intended use of the assignment?

The intended user is a small financial institution. The appraisal is for mortgage loan purposes. I'm assuming it's for a refinance of the original construction loan.

 

[Highlight17]

The intended user is a small financial institution. The appraisal is for mortgage loan purposes. I'm assuming it's for a refinance of the original construction loan.

If its Federally Regulated, then remember the Scope is likely to require an opinion of "Market Value", as commonly defined (i.e. OCC). Therefore, the "most probable price" will be a function of what the market tells you about the most probable buyer / user. If the data suggests that the real estate and business would likely sell together, than that is how it needs to be valued (assuming, as you've indicated, that this business generates excess earnings). Certainly, a federally regulated institution will require that you estimate the contributory value of the components which comprise the Total Assets of the Business, but be careful about deciding up front that you are going to limit your scope to just the real estate.

 

[hastalavista]

I agree with Highlight in general and would add the following:
For the assignment you describe, I think the expectation is to have a sales and income approach analysis. Sales of fast food restaurants occur regularly; if those sales include BEV, etc., the expectation would be to include that component in the analysis so that a proper deduction can be made in the SCA.

Good luck!

 

[Meandering]

FF&E also

 

[Eli]

Your highest and best use analysis is critical if the opinion of value is "market value". Be very specific in H&B use. Like a specific franchise. Now you can go the opposite and have a H&B use as a fast food restaurant like it is DARK and boarded up.

The first one I did, I worked for almost nothing. It was a Steak N Shake in a thriving commercial area. It was pre construction. An underwriter from what was the biggest bank in the world made me change it to "as if dark".

Restaurants and Hotels are very similar when it goes to business value.

An accountant can be a huge asset on business value (going concern). Kind of like an engineer's report on large commercial property.

I don't do restaurants anymore. Lol